Business Laws and Ethics · Employees State Insurance Act, 1948

ESI Scheme: Objectives, Applicability and Key Definitions

Updated 10 October 2026 · Fact-checked

The ESI scheme gives employees of covered establishments medical care and cash benefits for sickness, maternity, employment injury and death. The Employees' State Insurance Act, 1948 was the original statute; the Code on Social Security, 2020 carries the ESI provisions in Chapter IV. To solve, test coverage of the unit, then the worker's status, then apply the defined terms.

Understand ESI Scheme: Objectives, Applicability and Key Definitions

The Employees' State Insurance scheme is a contributory social security scheme for workers. Employer and employee both pay contributions into a fund. In return, the insured worker and the worker's family get medical care, and the worker gets cash benefits when income stops because of sickness, maternity, employment injury or similar events. The idea is simple: pool small contributions so that a worker is not ruined by one illness or accident.

Which law governs. The scheme began under the Employees' State Insurance Act, 1948. The Code on Social Security, 2020 carries the ESI provisions in its Chapter IV. Whether the Code has repealed or replaced the 1948 Act, and from what date, depends on the Code's repeal and savings provision and its commencement notifications. These are not in the text checked for this page, so do not state it as fact. Follow the law your ICMAI study material prescribes, and describe the 1948 Act as the original statute if you mention it.

Earlier position under the 1948 Act, section 1. It extended to the whole of India. It applied first to all factories, including Government factories, other than seasonal factories. A Government factory or establishment whose employees already received substantially similar or superior benefits was left out. The appropriate Government could extend it to other establishments by notification. Once a factory or establishment was covered, it stayed covered even if its headcount fell or it stopped using power. These rules show where the scheme came from. Treat them as the earlier position, and confirm in your study material how far they still matter for your exam.

Under the Code. The Code keeps the same core idea of contributions in return for medical and cash benefits. It places the ESI provisions in Chapter IV. The terms you must know are employee, wages, dependant, employer, Corporation and appropriate Government. Questions test whether you can apply these terms to a short fact pattern. The exact definitions, including the list of items that make up wages, are in the Code's definitions section. They are outside the text checked for this page, so learn them from your ICMAI study material.

Coverage thresholds and wage limits. The number of persons that makes a unit covered, and the wage limit for an insured employee, are fixed by the law, rules and notifications. They are not given in the text checked for this page, so no figure is stated here. If a question gives a figure, use it. Otherwise take the current figure from your latest study material.

Exemption. Section 143 of the Code lets the appropriate Government exempt an establishment or class of establishments, or employees, from provisions of the Code. It does this only on conditions, and only where employees already get substantially similar or superior benefits. This is the best-supported part of the topic for written answers.

Key rules to remember

Objective of the scheme: Contributions (employer + employee) → ESI Fund → medical care + cash benefits; Benefits cover sickness, maternity, employment injury and death-related dependants' benefit.
Governing law: ESI Act, 1948 (original statute) → Code on Social Security, 2020, Chapter IV (ESI provisions); Answer on the Code's Chapter IV. Mention the 1948 Act as the original statute. Do not say it is repealed unless your study material states it.
Coverage test: Covered unit + employee within the wage limit = insured person; The headcount and wage limit are set by law and notification, not by the Code text checked here. Use the figure given in the question or in the latest study material.
Grant of exemption (Code, section 143(1) and (4)): Notification by appropriate Government + prior consultation with the Corporation (Chapter IV) + employees get substantially similar or superior benefits; If the benefits are not substantially similar or superior, exemption cannot be granted.
Period of exemption (Code, section 143(3)): Initially 3 years from publication of the notification; may be extended; The extension is for the period the Central Government prescribes. The 3 years is only the initial period.
Cancellation (Code, section 143(7) and (8)): Failure to comply with conditions → exemption may be cancelled → surplus, reserves and employees' accumulations go to the statutory fund; The transfer is made within the time and manner given in the conditions for exemption.
Surrender (Code, section 143(9)): Board of trustees' resolution → employer's application → Government allows contributions to statutory funds from the date specified → cancellation → transfer of accumulations; The transfer is made within the time and manner notified by the appropriate Government.

How to solve ESI Scheme: Objectives, Applicability and Key Definitions questions

Use the same sequence for any question on ESI objectives, coverage, exemption or definitions.

1Identify what is asked: objective, coverage of a unit, status of a person, meaning of a defined term, or exemption.
2Say which law applies: the Code on Social Security, 2020 carries the ESI provisions in Chapter IV. The 1948 Act was the original statute.
3For coverage, check whether the unit and the worker meet the headcount and wage limit given in the question or notified. Do not invent figures.
4For a person, test whether the person is an employee as the Code defines the term, and whether the wage limit is met.
5For exemption, check three things: notification by the appropriate Government, prior consultation with the Corporation, and substantially similar or superior benefits.
6Name the appropriate Government (Central or State) when the question asks who can notify, exempt, cancel or allow surrender.
7State the conclusion in one line and attach the rule, with the section only where you are sure of it.

Quickest way: Four-gate check for ESI coverage and exemption

When to use it: Use it for MCQs and short fact-based questions where you must decide quickly whether a unit or worker is covered, or whether an exemption is valid.

Gate 1: Is the unit within Chapter IV of the Code on the headcount and other limits given? If not, not covered.
Gate 2: Is there an exemption notification? If yes, check that the employees get substantially similar or superior benefits and that the Corporation was consulted.
Gate 3: Is the worker an employee within the wage limit given in the question? If not, not an insured employee.
Gate 4: Has the exempted employer complied with the conditions and is the exemption still within its period? If not, it may be cancelled or may have lapsed.
Write the answer with the rule in one sentence.

Common mistakes in ESI Scheme: Objectives, Applicability and Key Definitions

Answering only on the ESI Act, 1948 and ignoring the Code.
Older books and notes present the 1948 Act as the main statute.
Fix: Use the Code on Social Security, 2020 (Chapter IV) for the ESI provisions. Mention the 1948 Act as the original statute, and do not state that it is repealed unless your study material says so.
Assuming an exemption is granted just because the employer asks for it.
Students forget the conditions attached to exemption.
Fix: Under section 143, exemption needs a notification, prior consultation with the Corporation for Chapter IV, and employees who already get substantially similar or superior benefits.
Treating an exemption as permanent.
Students remember the grant but not its time limit.
Fix: Section 143(3) says the exemption is initially for three years from publication of the notification. It can be extended.
Forgetting that exemption can be cancelled.
Students stop at the grant of exemption.
Fix: If the employer fails to comply with the conditions, the appropriate Government may cancel the exemption under section 143(7). The accumulations then move to the statutory fund under section 143(8).
Confusing the appropriate Government with the Central Government always.
Students default to the Centre.
Fix: The appropriate Government depends on the establishment. Read the question to see whether the Central or a State Government is involved.
Quoting wage limit and headcount figures as permanent.
Numbers are memorised once and never rechecked.
Fix: Use the figure given in the question. Otherwise write it as the currently notified figure and verify it in your latest study material before the exam.

Worked examples

Example 1

A State Government wants to exempt a class of establishments from Chapter IV of the Code on Social Security, 2020. The employees of these establishments get only a small medical reimbursement, which is clearly lower than the benefits under the Code. Can the exemption be granted?

Show the solution

Power: section 143(1) lets the appropriate Government, by notification, exempt an establishment or class of establishments from any or all provisions of the Code or the scheme.
Consultation: for Chapter IV, the exemption cannot be granted without prior consultation with the Corporation.
Condition: under section 143(4), exemption is granted only if the employees are otherwise in receipt of benefits substantially similar or superior to those under the Code or the scheme.
Application: the benefits here are lower, so the condition is not met.

Answer: The exemption cannot be granted. Exemption is allowed only where employees already get benefits substantially similar or superior to those under the Code. Prior consultation with the Corporation is also needed for Chapter IV.

Example 2

An establishment exempted from Chapter IV of the Code now wants to give up its exemption. Explain the steps and what happens to the accumulated funds, as stated in section 143.

Show the solution

Resolution: the board of trustees of the establishment must first pass a resolution to surrender the exemption.
Application: the employer applies to the appropriate Government for surrender from the date specified in the application.
Government action: on receipt, the appropriate Government may allow the employer to remit contributions to the statutory funds under the Code from that date, and processes the cancellation of the exemption.
Transfer: on cancellation, the employer and the board of trustees transfer each employee's accumulation, and the surplus and reserves, from the exempted fund to the concerned statutory funds.
Time and manner: the transfer is made within the time and in the manner notified by the appropriate Government.

Answer: The board of trustees passes a resolution and the employer applies for surrender from a specified date. The appropriate Government may allow contributions to the statutory funds from that date and processes the cancellation. The employer and the board then transfer employees' accumulations, surplus and reserves to the statutory funds within the notified time and manner.

Example 3

An employer holds an exemption from Chapter IV of the Code on Social Security, 2020. Explain the conditions for grant, the initial period and the effect of non-compliance, as stated in section 143.

Show the solution

Power: the appropriate Government may, by notification, exempt an establishment or class of establishments, or employees, from any or all provisions of the Code or schemes.
Consultation: exemption from Chapter IV needs prior consultation with the Corporation.
Condition of grant: section 143(4) allows exemption only if the employees are otherwise in receipt of benefits substantially similar or superior to the benefits under the Code or the scheme.
Period: under section 143(3), the exemption is initially for three years from publication of the notification and can be extended.
Non-compliance: under section 143(7), if the employer fails to comply with the conditions, the appropriate Government may cancel the exemption.
Consequence of cancellation: under section 143(8), the surplus, reserves and accumulations to employees' credit in the exempted fund go to the respective statutory fund.

Answer: Exemption needs prior consultation with the Corporation and is granted only where the employees get substantially similar or superior benefits. It lasts initially three years and can be extended. The Government may cancel it for non-compliance, after which the accumulated amounts move to the statutory funds.

Exam tips

Start every answer by naming the Code on Social Security, 2020 (Chapter IV) as the law carrying the ESI provisions. Call the 1948 Act the original statute if you mention it.
Learn section 143 as a list: power, consultation, substantially similar or superior benefits, three-year initial period, cancellation, surrender. These are tested as one-line MCQs and short notes.
Treat headcount and wage limit figures as notified values. Use the figure in the question, or the latest study material, and never from memory.
For defined terms, write the definition from your study material, then apply it to the facts in one line.
In a 14-mark answer, start with the objective, then coverage, then definitions or exemption, and keep each in a short paragraph or bullet.
Watch the words substantially similar or superior. They decide whether an exemption can be granted under section 143(4).

Practice questions from Employees State Insurance Act, 1948

ESI Scheme: Objectives, Applicability and Key Definitions: frequently asked questions

What is the objective of the Employees' State Insurance scheme?

It provides social insurance to workers in covered units through contributions from employer and employee. The fund pays for medical care and cash benefits during sickness, maternity, employment injury and similar events. It protects the worker and the worker's family from sudden loss of income.

Which law governs the ESI scheme now?

The Code on Social Security, 2020 carries the ESI provisions in Chapter IV. The Employees' State Insurance Act, 1948 was the original statute. Whether and from when the Code replaces the Act depends on the Code's repeal and savings provision and its commencement notifications, so follow what your ICMAI study material prescribes.

What is the ESI coverage threshold and wage limit?

Coverage depends on the number of persons employed in the unit and on the worker being within a wage limit. Both are fixed by the law, rules and notification. They are not given in the text checked for this page, so use the figure in the question or in your latest study material.

How are wages defined under the Code on Social Security, 2020?

The Code defines wages in its definitions section, with a list of what is included and what is excluded. Learn the exact definition from your ICMAI study material, because it is outside the text checked for this page. In an answer, split the pay into included and excluded items and show your working.

Can an establishment be exempted from the ESI provisions?

Yes. Section 143 of the Code lets the appropriate Government exempt an establishment by notification. For Chapter IV it needs prior consultation with the Corporation, and the employees must get substantially similar or superior benefits. The exemption is initially for three years.