Tag: Provident Fund

Management Notes

Code on Social Security, 2020, Objectives, Social Security Schemes, Laws Subsumed, Offences, Impact

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The Code on Social Security, 2020 is one of India’s four labour codes, consolidating nine existing social security laws, including the Employees’ Provident Fund Act, Employees’ State Insurance Act, Maternity Benefit Act, Payment of Gratuity Act, and Unorganised Workers’ Social Security Act. It aims to extend social security coverage provident fund, health insurance, maternity benefits, gratuity, and pension to a wider workforce, including gig workers, platform workers, and unorganised sector employees, who were largely excluded earlier. The Code introduces a National Social Security Board to recommend welfare schemes for these categories, and enables Aadhaar-based registration for social security benefits, promoting universal coverage.

Objectives of the Code on Social Security, 2020:

1. Universalisation of Social Security Coverage

The primary objective of the Code on Social Security, 2020 is to extend social security benefits to the entire workforce, including organised, unorganised, gig, and platform workers, who were historically excluded from formal schemes. By consolidating nine separate laws, the Code creates a unified framework applicable across sectors and employment types. It mandates registration of unorganised workers, gig workers, and platform workers to enable access to schemes related to health, maternity, old age, and death/disablement benefits, moving India closer to a comprehensive, inclusive social security net covering the majority of its labour force.

2. Simplification and Consolidation of Multiple Laws

The Code aims to simplify compliance by merging nine fragmented laws including the EPF Act, ESI Act, Maternity Benefit Act, and Payment of Gratuity Act into a single, coherent statute. This reduces administrative overlap, eliminates inconsistent definitions across laws, and creates a uniform registration and compliance mechanism for employers. By harmonizing multiple regulatory bodies and processes into fewer, streamlined systems, the objective is to lower compliance costs for businesses, reduce litigation arising from conflicting provisions, and make social security administration more transparent and efficient for both employers and employees.

3. Extending Benefits to Gig and Platform Workers

A key objective is formally recognizing and protecting gig workers and platform workers a rapidly growing segment in India’s economy who previously had no statutory social security coverage. The Code defines these categories explicitly and enables the government to formulate specific welfare schemes covering life and disability insurance, health and maternity benefits, and old-age protection for them. Funding may come from contributions by aggregators (platforms like ride-hailing or delivery apps). This objective reflects the Code’s adaptation to changing employment patterns, ensuring modern, non-traditional forms of work are not left outside the social security framework.

4. Establishing Institutional Mechanisms for Implementation

The Code aims to strengthen governance of social security through dedicated institutional bodies. It establishes a National Social Security Board to recommend and monitor schemes for unorganised, gig, and platform workers, alongside existing bodies like the EPFO (Employees’ Provident Fund Organisation) and ESIC (Employees’ State Insurance Corporation), whose composition and functions are also updated. This objective ensures that policy formulation, fund management, and scheme implementation are handled by specialized, accountable institutions, improving the effectiveness of welfare delivery and enabling continuous monitoring and revision of social security schemes as workforce needs evolve.

5. Enabling Technology-Driven, Portable Social Security

The Code seeks to modernize social security administration through Aadhaar-based registration and digital record-keeping, enabling workers especially migrant and unorganised workers to access benefits regardless of location or employer changes. This objective supports the portability of social security benefits, addressing a major limitation of earlier laws where benefits were often tied to a specific employer or region. By leveraging technology for registration, contribution tracking, and benefit disbursal, the Code aims to reduce fraud, improve transparency, and ensure workers do not lose accumulated benefits when they change jobs or migrate for work.

Social Security Schemes of the Code on Social Security, 2020:

1. Employees’ Provident Fund (EPF) Scheme

The EPF Scheme, continued under the Code on Social Security, 2020 (subsuming the earlier EPF Act, 1952), provides a retirement savings mechanism for employees in establishments with 20 or more workers. Both employer and employee contribute a percentage of wages (typically 12% each) to a provident fund managed by the EPFO. On retirement, resignation, or specified contingencies, employees can withdraw accumulated funds with interest. The Code retains this scheme’s core structure while enabling extended coverage options for smaller establishments and certain unorganised sector workers who opt in voluntarily, strengthening long-term financial security for the workforce.

2. Employees’ State Insurance (ESI) Scheme

The ESI Scheme, carried forward from the earlier ESI Act, 1948, provides medical, sickness, maternity, and disablement benefits to employees earning below a prescribed wage ceiling, funded through contributions from both employer and employee. Administered by the ESIC, it covers establishments with 10 or more workers (with flexibility for hazardous industries to have lower thresholds). Under the 2020 Code, the scheme’s applicability is expanded to plantation workers, gig and platform workers, and establishments in hazardous sectors regardless of worker count, broadening healthcare and insurance protection to previously excluded categories of the workforce.

3. Gratuity Scheme

Continuing provisions from the Payment of Gratuity Act, 1972, this scheme provides a lump-sum payment to employees upon retirement, resignation, death, or disablement, after completing at least 5 years of continuous service (the condition is relaxed for fixed-term employees and in cases of death/disablement). Gratuity is calculated based on the last drawn wages and years of service. The Code on Social Security, 2020 extends gratuity eligibility to fixed-term employees on a pro-rata basis without requiring the 5-year threshold, recognizing changing employment patterns and ensuring short-term and contractual workers also receive fair terminal benefits.

4. Maternity Benefit Scheme

Derived from the Maternity Benefit Act, 1961, this scheme entitles women employees to paid maternity leave (26 weeks for the first two children, 12 weeks thereafter), along with benefits like nursing breaks and protection against dismissal during pregnancy. Establishments with 50 or more employees must also provide crèche facilities. The Code on Social Security, 2020 retains these protections while integrating them into the unified framework, ensuring maternity benefits remain a statutory right for women in organised employment and reinforcing workplace support for working mothers across covered establishments.

5. Employees’ Compensation Scheme

This scheme, continuing the Employees’ Compensation Act, 1923, provides for compensation to employees (or their dependents) in cases of injury, disability, or death arising out of and in the course of employment. Compensation amounts are based on factors like the employee’s wages, age, and extent of injury. Under the Code on Social Security, 2020, this scheme continues to apply broadly across industries, ensuring employers bear financial responsibility for occupational hazards and workplace accidents, thereby incentivizing safer working conditions and providing a financial safety net for affected workers and their families.

6. Social Security Schemes for Unorganised, Gig, and Platform Workers

A distinctive feature of the Code on Social Security, 2020, this framework empowers the central and state governments to formulate specific schemes covering life and disability insurance, health and maternity benefits, old-age protection, and any other welfare benefits for unorganised, gig, and platform workers. These schemes may be funded through contributions from the central government, state governments, and aggregators (e.g., app-based platforms). The National Social Security Board recommends and monitors these schemes, representing a landmark expansion of India’s social security net to previously unprotected, non-traditional categories of workers.

Laws Subsumed Under Code on Social Security, 2020:

1. Employees’ Compensation Act, 1923

This Act mandated compensation to employees or their dependents for injury, disability, or death arising out of and in the course of employment, with amounts based on wages, age, and severity of injury. It applied to workers in factories, mines, plantations, and other hazardous occupations, placing financial liability on employers for occupational accidents. Under the Code on Social Security, 2020, this Act is subsumed and continues largely unchanged, ensuring employers remain accountable for workplace injuries and deaths. The Code integrates its provisions into the unified compensation framework, maintaining protection for workers in physically hazardous industries against employment-related harm.

2. Employees’ State Insurance Act, 1948

This Act established the Employees’ State Insurance Corporation (ESIC) to provide medical, sickness, maternity, and disablement benefits to employees earning below a prescribed wage ceiling, funded through employer-employee contributions. It applied to establishments with 10 or more workers. Under the Code on Social Security, 2020, this Act is subsumed with expanded coverage extending ESI benefits to plantation workers, gig and platform workers, and mandatorily to establishments in hazardous industries regardless of employee count. This broadens access to healthcare and insurance protections that were earlier limited to a narrower segment of the organised workforce.

3. Employees’ Provident Funds and Miscellaneous Provisions Act, 1952

This Act created the Employees’ Provident Fund (EPF), a mandatory retirement savings scheme requiring employer-employee contributions (typically 12% each of wages) for employees in establishments with 20 or more workers, managed by the EPFO. It also covered pension and insurance schemes for employees. The Code on Social Security, 2020 subsumes this Act, retaining its core contributory structure while enabling voluntary coverage extension to smaller establishments and self-employed or unorganised workers. This ensures continuity of India’s largest retirement savings mechanism while broadening its potential reach to previously excluded segments of the workforce.

4. Maternity Benefit Act, 1961

This Act entitled women employees to paid maternity leave 26 weeks for the first two children and 12 weeks for subsequent children along with nursing breaks, medical bonus, and protection against dismissal during pregnancy. Establishments with 50+ employees were required to provide crèche facilities. The Code on Social Security, 2020 subsumes this Act, retaining its core protections and integrating them into the broader social security framework. This ensures continued statutory support for working mothers, reinforcing India’s commitment to gender-inclusive workplace policies while streamlining maternity-related compliance alongside other social security obligations.

5. Payment of Gratuity Act, 1972

This Act mandated a lump-sum gratuity payment to employees upon retirement, resignation, death, or disablement, after completing at least 5 years of continuous service, calculated based on last drawn wages and tenure. The Code on Social Security, 2020 subsumes this Act and introduces a notable change extending gratuity eligibility to fixed-term employees on a pro-rata basis, without requiring the 5-year continuous service condition. This modification reflects the Code’s broader intent to ensure short-term and contractual workers, an increasingly significant part of the workforce, also receive fair terminal financial benefits proportional to their service duration.

6. Cine Workers Welfare Fund Act, 1981

This Act established a welfare fund for cine workers (individuals employed in film production) financed through a cess levied on feature films, providing financial assistance for medical treatment, housing, and other welfare measures to workers in the film industry. Under the Code on Social Security, 2020, this Act is subsumed into the unified social security framework, ensuring cine workers’ welfare provisions continue under the broader, consolidated administrative structure. This integration reflects the Code’s approach of bringing niche, sector-specific welfare laws under a single umbrella while preserving their targeted benefits for specialized occupational groups.

7. Building and Other Construction Workers’ Welfare Cess Act, 1996

This Act imposed a cess on construction costs (typically 1%) incurred by employers, with proceeds channeled into welfare funds for construction workers, covering healthcare, education, and social security needs of this highly informal and mobile workforce. Under the Code on Social Security, 2020, this Act is subsumed, continuing the cess-based funding mechanism while integrating construction workers’ welfare into the broader social security architecture. This ensures that one of India’s largest informal labour segments construction workers remains covered under a structured, continuously funded welfare system despite the sector’s inherently transient employment nature.

8. Employees’ Exchanges (Compulsory Notification of Vacancies) Act, 1959

This Act required certain employers to notify vacancies to designated employment exchanges, facilitating job matching and labour market information collection, though it did not mandate hiring through these exchanges. Under the Code on Social Security, 2020, this Act is subsumed, and its notification requirements are integrated into the Code’s broader administrative and reporting framework. While its direct role in job placement has diminished with the rise of digital job platforms, its subsumption ensures continuity of formal vacancy reporting mechanisms, which can support labour market data collection and policy planning.

9. Unorganised Workers’ Social Security Act, 2008

This Act aimed to provide social security to unorganised sector workers (street vendors, domestic workers, agricultural labourers, etc.) through welfare schemes covering life, health, and old-age protection, though implementation remained weak due to lack of enforcement mechanisms. The Code on Social Security, 2020 subsumes this Act and significantly strengthens its framework by introducing a National Social Security Board, mandatory registration for unorganised, gig, and platform workers, and clearer funding mechanisms involving government and aggregator contributions transforming a previously underutilized law into a more structured and enforceable social security mechanism for India’s vast informal workforce.

Offences and Penalties Under the Code:

1. Failure to Pay Contributions (EPF/ESI)

Under the Code on Social Security, 2020, an employer who deducts an employee’s contribution towards EPF or ESI but fails to deposit it with the appropriate authority is liable for imprisonment ranging from 1 to 3 years, along with a fine of ₹1 lakh. This offence is treated seriously as it involves misappropriation of employee funds meant for retirement and health security. The provision aims to deter employers from withholding statutory dues, ensuring that deducted contributions are promptly credited, thereby protecting employees’ accumulated social security benefits from employer default or financial mismanagement.

2. Failure to Register or Submit Returns

Employers who fail to register their establishment or submit required returns and records under the Code face a fine which may extend up to ₹50,000, with enhanced penalties for repeat offences. This provision ensures that establishments remain within the formal regulatory net, enabling authorities to monitor compliance, track contributions, and maintain accurate employment records. Non-registration undermines the Code’s broader objective of extending social security coverage, particularly for unorganised, gig, and platform workers, making strict enforcement of registration and reporting obligations essential to the Code’s overall effectiveness.

3. Obstruction of Inspectors-cum-Facilitators

The Code empowers Inspectors-cum-Facilitators to inspect establishments, verify compliance, and guide employers on statutory obligations. Any person who obstructs, refuses entry, or fails to produce records for such inspection is liable to a fine of up to ₹50,000. This provision balances the Code’s compliance-facilitation approach where inspectors also advise rather than solely penalize with enforcement authority, ensuring employers cannot evade scrutiny. It supports transparent monitoring of social security compliance while preserving the Code’s broader philosophy of reducing adversarial employer-inspector relationships wherever possible.

4. False Statements and Fraudulent Claims

Under the Code, any person who makes a false statement or representation to avoid payment of contributions, or to enable another person to avail benefits wrongfully, is punishable with imprisonment up to 6 months, a fine of ₹50,000, or both. This provision safeguards the integrity of the social security system, preventing fraudulent claims that could deplete funds meant for genuine beneficiaries. It reinforces accountability among employers, employees, and intermediaries, ensuring that the Code’s welfare schemes including those for gig and unorganised workers are not misused or exploited.

5. Repeat Offences and Enhanced Penalties

The Code prescribes enhanced penalties for repeat offenders, typically doubling the fine amount or increasing imprisonment terms for a second or subsequent conviction of the same offence. This provision is designed to deter habitual non-compliance, particularly among employers who treat initial penalties as a routine cost of doing business rather than a deterrent. By escalating consequences for continued violations, the Code strengthens enforcement credibility and encourages sustained, long-term compliance with social security obligations rather than sporadic or reactive adherence following isolated penalty actions.

 

Impact of Code on Social Security, 2020:

1. Impact on Employers

The Code brings single registration and single return under Section 3, reducing compliance burden. Under Section 15, employer must pay EPF and ESI contributions electronically. Section 123 to 132 provide for enhanced penalties and compounding. Liability is widened to include contractors and aggregators. Section 17 mandates timely payment of contributions. Failure attracts damages up to 100% and imprisonment. It promotes ease of doing business through common Social Security Fund and uniform definitions of wages under Section 2(y).

2. Impact on Organised Sector Employees

For organised workers, existing benefits of EPF, ESI, gratuity are retained and strengthened. Under Section 2(55), definition of employee is widened. Section 57 provides gratuity even after fixed-term employment. Section 15 ensures social security coverage for all establishments. Section 28 & 32 expand ESI coverage to unorganised sector voluntarily. Employees get right to unemployment assistance under Section 82. The Code ensures portability of benefits and universal account number based services for better job security.

3. Impact on Unorganised, Gig and Platform Workers

This is the most progressive impact. For the first time, unorganised workers, gig workers and platform workers are defined under Section 2(60), 2(35) & 2(61). Under Section 6 & 114, Central Government will frame schemes for life and disability cover, health, old age protection. Under Section 141, a National Social Security Board will be constituted. Funding will be through contribution from aggregators under Section 141(3). It aims to provide universal social security and formalises informal labour market.

4. Impact on Overall Labour Administration

The Code creates a unified and centralised system. Under Section 20, appointment of Inspector-cum-Facilitator instead of Inspector promotes compliance support. Under Section 152, social security fund will be created. Section 154 allows electronic governance. It replaces multiple overlapping laws with one Code, ensuring uniformity, transparency and accountability. It aligns with Article 41 & 42 of Constitution. Overall, it moves India towards rights-based and inclusive social security regime covering entire workforce by 2030.

Management Notes

Definitions: Salary, Allowances, Perquisites and Profits in Lieu of Salary, Provident Fund, Retirement Benefits, Gratuity, Pension and Leave Salary

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Under the Income Tax Act, salary includes various forms of monetary and non monetary benefits received by an employee from an employer. Salary income is not limited to basic pay. It may include allowances, perquisites, retirement benefits, gratuity, pension, leave salary and profits in lieu of salary. Understanding these terms is important for determining the taxable income of an individual under the Head Salaries.

1. Salary

Salary means the remuneration received by an employee from an employer or former employer for services rendered. Under Section 17(1), salary includes basic salary, wages, pension, gratuity, fees, commission, bonus, taxable allowances, perquisites and certain profits in lieu of salary. Salary is generally taxable under the Head Salaries when there exists an employer and employee relationship. It may be paid monthly, annually or at other intervals. Salary can be received in cash or, in certain cases, through benefits having monetary value. For income tax purposes, salary is taxable on the basis of the provisions relating to accrual and receipt. Various deductions and exemptions may be available while calculating taxable salary income.

2. Allowances

Allowances are fixed amounts paid by an employer to an employee in addition to basic salary to meet particular expenses or provide additional compensation. Examples include Dearness Allowance, House Rent Allowance, Transport Allowance and Special Allowance. Allowances may be fully taxable, partly exempt or fully exempt depending upon their nature and the conditions prescribed under the Income Tax Act. House Rent Allowance may receive exemption subject to prescribed conditions. Some allowances are provided specifically for official duties, while others are paid as part of regular remuneration. For income tax purposes, the treatment of an allowance depends upon the relevant provision of law and the circumstances under which it is received by the employee.

3. Perquisites

Perquisites are benefits or facilities provided by an employer to an employee in addition to normal salary. They may be provided in cash, kind or through the use of facilities. Examples include rent free accommodation, motor car facility, concessional loans, free education and certain employer provided benefits. Under Section 17(2), specified benefits and facilities are treated as perquisites for income tax purposes. The taxable value of a perquisite is generally determined according to prescribed rules. Some perquisites may be exempt or may have special valuation provisions. Perquisites are important because they increase the employee’s taxable salary even though the employee may not receive the benefit directly as cash.

4. Profits in Lieu of Salary

Profits in lieu of salary are amounts or benefits received by an employee or former employee that are connected with employment but are not ordinary salary payments. Under Section 17(3), they include certain amounts received from an employer or former employer in connection with termination or modification of employment. They may also include certain payments received under specified arrangements relating to employment. Examples can include compensation received on termination of employment and certain payments received before or after employment under prescribed conditions. Such receipts are generally taxable under the Head Salaries, subject to applicable exemptions and deductions. The purpose of this provision is to ensure that employment related compensation cannot escape taxation merely because it is not called salary.

5. Provident Fund

A Provident Fund is a retirement savings arrangement under which contributions are made by the employee and, in applicable cases, by the employer. The amount accumulated in the fund, together with applicable interest, is generally intended to provide financial security after retirement or on specified occasions. Different types include Statutory Provident Fund, Recognised Provident Fund, Unrecognised Provident Fund and Public Provident Fund. Their income tax treatment differs according to the applicable rules. Employer contributions, interest and withdrawals may be taxable or exempt depending upon the type of fund and prescribed conditions. Therefore, while calculating salary income, it is necessary to identify the nature of the provident fund and apply the relevant provisions governing contributions, interest and final withdrawal.

6. Retirement Benefits

Retirement benefits are amounts or facilities received by an employee because of retirement, resignation, termination or completion of service. They are designed to provide financial security after employment. Important retirement benefits include gratuity, pension, provident fund, leave encashment and certain retirement compensation. The tax treatment of these benefits depends upon the nature of the benefit, the employee’s status and the conditions prescribed under the Income Tax Act. Some retirement benefits may be fully exempt, while others may be partly taxable subject to specified limits. For salary taxation, retirement benefits must therefore be separately examined and the applicable exemption or deduction must be considered before determining the employee’s final taxable salary income.

7. Gratuity

Gratuity is a retirement benefit paid by an employer to an employee as recognition of services rendered during employment. It is generally payable on events such as retirement, resignation, death or disablement, subject to the applicable rules. Gratuity received by employees may be governed by the Payment of Gratuity Act or other applicable employment provisions. Under Section 10(10), gratuity may be fully or partly exempt from income tax depending upon the category of employee and prescribed conditions and limits. Any amount exceeding the applicable exemption is generally taxable under the Head Salaries. Gratuity is therefore an important retirement benefit that must be considered while calculating taxable salary income.

8. Pension

Pension is a regular payment received by an employee after retirement as a benefit for services rendered during employment. It may be received from the employer, government or an approved pension arrangement, depending upon the employment and pension scheme. Pension may be uncommuted or commuted. Uncommuted pension is generally received periodically and is taxable according to the applicable provisions. Commuted pension, which represents a lump sum received by surrendering part of the future pension, may be fully or partly exempt under Section 10(10A), depending upon the circumstances. Pension is treated as salary for income tax purposes when received by an employee or former employee and is therefore considered while determining taxable income under the Head Salaries.

9. Leave Salary

Leave salary refers to the amount received by an employee in respect of accumulated leave, particularly when leave is not actually taken. The payment is commonly known as leave encashment. It may be received during employment or at the time of retirement, resignation or termination. Leave encashment received during employment is generally taxable, subject to applicable provisions. Under Section 10(10AA), leave encashment received on retirement by certain employees may be fully or partly exempt, subject to prescribed conditions and limits. The treatment differs for Government employees and other employees. Therefore, while computing taxable salary, the nature and timing of leave salary received by the employee must be examined before determining the taxable amount.

Management Notes

Income Exempted [Schedule II Read with Sec 11]

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Under the Income Tax Act, 2025, certain specified incomes are excluded from total income subject to the conditions prescribed by law. Schedule II read with Section 11 provides exemptions for specified categories of income. These exemptions are intended to provide relief where the nature or source of income is considered deserving of special treatment. Exempt income is not included in taxable income when the prescribed conditions are satisfied. However, exemption is not automatic in every case. The taxpayer or entity must meet the relevant requirements, maintain prescribed records and comply with applicable conditions. The following are important categories of income that may receive exemption under the specified provisions.

1. Agricultural Income

Agricultural income qualifying under the applicable provisions is generally exempt from income tax. It includes specified income arising from agricultural activities carried out on agricultural land situated in India. However, the income must satisfy the statutory definition of agricultural income. Agricultural income may also be considered for certain rate calculation purposes under the applicable provisions, even though it is not directly included in taxable total income.

2. Income of Charitable or Religious Institutions

Income of qualifying charitable or religious institutions may be exempt when the institution satisfies the prescribed conditions. The exemption is generally connected with the application of income towards approved charitable or religious purposes. Registration, compliance requirements, permitted application of income and other statutory conditions may need to be fulfilled. Income that does not satisfy the applicable requirements may become taxable.

3. Income of Certain Local Authorities

Certain income of specified local authorities may be exempt where the conditions prescribed under the Income tax law are satisfied. Such provisions are intended to provide tax relief to qualifying authorities in respect of income falling within the specified categories. The exemption is subject to the nature of the authority and the particular income involved.

4. Income of Specified Institutions

The law may provide exemption to income of certain specified educational, medical, social welfare or other institutions where the prescribed conditions are fulfilled. The purpose of these provisions is to support activities considered beneficial to society. The institution must satisfy the statutory requirements relating to its activities, registration or approval, wherever applicable.

5. Certain Retirement Benefits

Specified retirement benefits may be wholly or partly exempt subject to prescribed conditions. Examples may include qualifying gratuity, pension and leave encashment. The extent of exemption can depend on factors such as the type of employee, nature of employment, amount received and other conditions specified by law. Any amount exceeding the permitted exemption may become taxable.

6. Certain Income of Members

In specified situations, income received by a member from an entity may receive special tax treatment to avoid inappropriate double taxation. The exemption depends on the particular nature of the income and the provisions applicable to the entity and its members.

7. Other Specified Exempt Income

Schedule II may also cover other categories of receipts or income that are specifically excluded from total income. The exemption is available only when the conditions prescribed for the particular category are satisfied. Therefore, taxpayers should identify the exact statutory provision applicable to the income rather than assuming that every similar receipt is exempt.

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