Govt reduces ESI contribution rate to 4% from existing 6.5%, industry to save Rs Rs 5,000 crore annually

New Delhi: The government Thursday announced a cut in contributions made by employers and employees toward the health insurance scheme of Employees' State Insurance Corporation (ESIC) to 4 percent from the existing 6.5 percent, a move which would lead to an estimated annual saving of around Rs 5,000 crore for firms.

The reduced rates will be effective from 1 July, 2019, the Labour Ministry said in a release. This would benefit 3.6 crore employees and 12.85 lakh employers.

"The government has taken a historic decision to reduce the rate of contribution under the Employees' State Insurance Act from 6.5 percent to 4 percent (employers' contribution being reduced from 4.75 percent to 3.25 percent and employees' contribution being reduced from 1.75 percent to 0.75 percent)," the ministry said.

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As many as 12.85 lakh employers and 3.6 crore employees contributed Rs 22,279 crore towards the ESI scheme in 2018-19.

Representational image. Reuters.

Back of the envelope calculations suggest that a reduction in the contribution rate for employers would results in annual savings of over Rs 5,000 crore to these firms.

The ministry said that the reduced rate of contribution will bring about a substantial relief to workers and facilitate further enrollment of workers under the Employees' State Insurance (ESIC) scheme and bring more and more workforce into the formal sector.

Similarly, reduction in the share of contribution of employers will reduce the financial liability of the establishments leading to improved viability of these establishments. This shall also lead to enhanced Ease of Doing Business.

It is also expected that the reduction in the rate of ESI contribution shall lead to improved compliance of the law. The Employees' State Insurance Act 1948 (the ESI Act) provides for medical, cash, maternity, disability and dependent benefits to the Insured Persons under the Act.

The ESI Act is administered by the Employees' State Insurance Corporation (ESIC). Benefits provided under the ESI Act are funded by the contributions made by the employers and the employees.

Under the ESI Act, employers and employees both contribute their shares respectively. The Government of India through the Ministry of Labour and Employment decides the rate of contribution under the ESI Act.

The government in its pursuit of expanding the social security coverage to more and more people started a programme of special registration of employers and employees from December, 2016 to June, 2017 and also decided to extend the coverage of the scheme to all the districts in the country in a phased manner.

The wage ceiling of coverage was also enhanced from Rs 15,000 per month to Rs 21,000 from 1 January, 2017.