By Ashutosh Agarwal, Manager, Global Benefits, GoGlobal
The International Monetary Fund (IMF) recently fast-tracked its predictions for India, forecasting that the world’s most populous country will become the third-largest economy by 2027. This projection underscores the rapidly expanding economic landscape of the world’s most populous nation. In tandem, a feature by the Financial Times highlights five undervalued aspects of India’s economy, emphasizing its status as one of the fastest-growing markets globally.
India’s dynamic economic environment offers vast opportunities for international businesses. However, doing business there also comes with unique challenges, particularly in managing talent and providing employee benefits. Navigating the complexities of benefits is essential for companies operating in India, not only to meet legal requirements but also to attract and retain top talent in a highly competitive market.
To support international companies eyeing up India for expansion, we’ve developed a comprehensive two-part blog series on offering employee benefits. In this first installment, we focus on the statutory benefits all employers in India are required to provide.
Statutory benefits: required for all employers in India
For any organization looking to establish or expand its operations in India, a comprehensive understanding of statutory benefits is essential. These benefits are not only mandated by law but are also integral to ensuring the well-being and financial security of employees.
Failure to comply can result in significant penalties, legal challenges and reputational damage. Moreover, providing these benefits demonstrates a commitment to employee welfare, which can enhance job satisfaction and loyalty.
Below is an overview of the primary statutory benefits required by Indian law:
Employees’ State Insurance (ESI)
The Employees’ State Insurance (ESI) scheme is designed to provide comprehensive social security to employees earning less than ₹21,000 per month (or ₹25,000 for employees with disabilities). This scheme covers medical, sickness, maternity and workplace injury benefits. Here’s how the contributions work:
- Employer Contribution: 3.25% of the employee’s salary
- Employee Contribution: 0.75% of the employee’s salary
Employees’ Provident Fund (EPF)
The Employees’ Provident Fund (EPF) is a retirement savings scheme that is one of the most significant benefits in India. Both employers and employees contribute 12% of the employee’s basic salary plus dearness allowance (DA) to this fund. The EPF accumulates over time, providing a substantial financial cushion for employees during retirement or for major life events.
Employees’ Pension Scheme (EPS)
The Employees’ Pension Scheme (EPS) is a component of the EPF. It is designed to provide a monthly pension to employees after retirement. The employer’s contribution to the EPF is partially diverted to the EPS. The employer contribution is set at 8.33% of the employee’s basic salary, capped at ₹15,000 per month. EPS ensures that employees have a steady income stream during retirement, contributing to their financial stability in later years.
Gratuity
Gratuity is a lump sum payment made to employees who have completed at least five years of continuous service with an employer. This benefit rewards long-term service and provides a financial cushion for employees as they transition out of a job. It is calculated based on the employee’s salary and years of service, with the formula:
Total years of service minus five * gross monthly earnings * 15/26 (15 days’ wages out of 26 monthly working days)
For instance, let’s look at an employee in India who earns ₹40,000 (US$476) per month and has worked for their employer for 20 years. If they resign, the employer calculates the gratuity payment as follows: 15 * 40,000 * 15/26 = 346,154. The employer must offer the employee a gratuity payment of ₹346,154 (US$4,123).
Leave Entitlements
Leave entitlements in India vary by state and industry, but they generally include:
- Annual Leave: Paid vacation days accrued based on service length.
- Sick Leave: Paid leave for illness, typically requiring a medical certificate.
- Maternity Leave: 26 weeks of paid leave for birth-giving employees.
- Casual Leave: Short-term leave for personal reasons or emergencies.
These leave entitlements are essential for offering time to rest, recover and attend to personal matters without financial loss.
National Holidays
Indian law mandates paid leave on national holidays, including Republic Day, Independence Day and Gandhi Jayanti. Employers must also provide compensatory time off or overtime pay for work performed on these holidays.
Employee Deposit Linked Insurance Scheme (EDLI)
The EDLI scheme provides life insurance coverage to employees, with the cost borne entirely by the employer. The scheme offers a payout of up to ₹600,000 in case of the employee’s death. The employer contribution is 0.5% of the employee’s basic salary, capped at ₹15,000 per month. This benefit ensures that employees’ families receive financial support in the event of their untimely death.
Bonuses
Under the Payment of Bonus Act, 1965, establishments with 20 or more employees must pay a statutory bonus. This applies to employees earning up to ₹21,000 per month who have worked for at least 30 days in a financial year. The statutory bonus ranges from a minimum of 8.33% to a maximum of 20% of the eligible amount. It must be disbursed within eight months following the close of the accounting year, typically by November each year. Additionally, companies may choose to offer a performance bonus at their discretion. There is no legal requirement in India to provide a 13th or 14th month bonus.
Up next: supplemental benefits in India
In the next installment of this series, we will explore supplemental benefits in India. While not legally required, these benefits can significantly enhance your company’s appeal to top talent, giving you a competitive edge in the market.
Stay tuned for a deeper dive into how you can optimize your benefits strategy in India.
Learn more about regulations and hiring in India here: Hire in India | GoGlobal
Contact us today to discover how the GoGlobal Global Benefits Team can help you design benefits that fuel business expansion and hiring in India.