New Delhi: In a move set to lead to an annual saving of Rs 5,000 crore for firms and benefit 3.6 crore employees and 12.85 lakh employers, the Ministry of Labour and Employment on Thursday reduced the rate of contribution under the Employees’ State Insurance (ESI) Act from 6.5% to 4%. (Also read: ESIC Board Okays Super Speciality Treatment For Workers With Just 6-month Contribution to ESI)

This is the first such reduction in 22 years, said a report.

This means that the employer’s contribution would be down to 3.25% from 4.75% and that of employees would be reduced to 0.75% from 1.75%. The reduced rates will be effective from July 1. The move would lead to an estimated annual saving of around Rs 5,000 crore for firms.

The reduced rates will be effective from July 1, 2019, the labour ministry said in a release.

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

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 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 ministry of labour and employment decides the rate of contribution under the ESI Act.

The 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 January 1, 2017.

The reduced rate of contribution will bring about a substantial relief to workers and it will facilitate further enrollment of workers under the ESI scheme and bring more workforce into the formal sector, said reports.

It would also reduce the financial liability of the establishments, giving them better viability.