Employee Benefits Design — Structuring Comprehensive Packages

Two groups of benefits

Employee benefits in India fall into two groups. Statutory benefits are required by law for employers within the relevant thresholds. Voluntary benefits are the employer's choice. A package is the first group, which is fixed, with whatever the employer adds from the second.

The statutory layer

The statutory benefits are provident fund, pension and Employees' Deposit Linked Insurance (EDLI), gratuity, ESI and maternity benefit. They now sit under the Code on Social Security, 2020, in force from 21 November 2025. Statutory bonus sits under the Code on Wages. Older material names the separate Acts that the Codes replaced.

Provident fund contributions are 12% of wages from each side, employer and employee, and are mandatory on wages up to the statutory ceiling of ₹15,000. Out of the employer's share, 8.33% of wages goes to the pension scheme. EDLI, the life cover attached to the provident fund, pays between ₹2.5 lakh and ₹7 lakh, subject to conditions such as 12 months' service.

ESI applies to employees in covered establishments earning wages up to ₹21,000 a month. Gratuity follows the 15/26 formula with a ceiling of ₹20 lakh.

The voluntary layer

Voluntary benefits include group term life, group health and group personal accident cover, superannuation and employer contributions to the NPS. These are commonly provided by employer choice; whether any of them is required in a particular case depends on the employer and the workforce. Their terms depend on the scheme the employer sets up and the policy it buys.

Where the benefit is a group life scheme, IRDAI's Master Circular on Life Insurance Products of 12 June 2024 provides for the Customer Information Sheet, a summary of the policy's key features, to go to every member. Members do not have to depend only on the master policy held by the employer.

Flexible plans and keyman cover

A flexible benefits plan, also called a cafeteria plan, gives each employee a menu of benefits and lets the employee choose the mix. People with different needs can choose differently. It does not replace the statutory benefits, and how each chosen benefit is taxed depends on the benefit and on the tax regime the employee is in.

Keyman insurance is not an employee benefit. The employer owns the policy and receives the proceeds; it protects the employer's business, not the employee's family.

Rules at a glance

Key points

• Statutory benefits are required by law within thresholds; voluntary benefits are the employer's choice.
• Provident fund, pension, EDLI, gratuity, ESI and maternity benefit sit under the Code on Social Security, 2020; statutory bonus under the Code on Wages.
• Provident fund: 12% of wages from each side, mandatory on wages up to ₹15,000; 8.33% of wages from the employer's share goes to pension.
• EDLI pays up to ₹7 lakh.
• Group term life, group health, group personal accident, superannuation and NPS contributions are voluntary.
• A flexible (cafeteria) plan lets each employee choose from a menu and does not replace statutory benefits.
• Keyman insurance protects the employer and is not an employee benefit.

Common misunderstandings

• Group health insurance is not statutory: it is a voluntary benefit.
• The 8.33% for pension is not an extra contribution: it comes out of the employer's 12%.
• A cafeteria plan does not let employees opt out of statutory benefits: it offers a choice among the voluntary ones.
• Keyman insurance is not part of the employees' package: its proceeds go to the employer.
• Statutory bonus is not under the Code on Social Security: it sits under the Code on Wages.

Questions people ask