This article is part of our guide to insurance for business owners, alongside group health insurance. If someone is hurt at work, the law already decides what the employer owes. This guide explains that liability under the new labour code, how big it can get, and how workmen compensation insurance takes it off the books.
The Short Answer
Workmen compensation insurance, also called employees’ compensation or WC insurance, covers an employer’s legal liability to pay compensation when an employee is injured, disabled or killed in an accident at work, or contracts an occupational disease. The liability exists whether or not you are insured. The policy simply pays it for you.
Since 21 November 2025, that liability sits in Chapter VII of the Code on Social Security, 2020, which replaced the Employees’ Compensation Act, 1923. The rules are broadly familiar, with one notable addition: an accident while commuting between home and work can now count as a work accident. For most private employers the insurance itself is not compulsory, but for any business with manual, factory, site or delivery staff, going without it means carrying a liability that can run to tens of lakhs per incident.
The duty to compensate is compulsory. Only the insurance is optional, which makes it a decision about who pays, not whether.
The Law Now
What the employer is liable for
Under section 74 of the Code, an employer must pay compensation when an employee suffers personal injury from an accident, or a listed occupational disease, arising out of and in the course of employment. In practice:
- Short absences are excluded. No compensation is due for disablement lasting three days or less.
- Some defences exist, but not for the worst outcomes. If the accident was caused by the employee being drunk, wilfully disobeying a safety order or removing a safety guard, the employer is not liable, except where the result is death or permanent total disablement.
- Commuting is now covered. Section 74(4) treats an accident on the way between home and work as arising from employment, where a link between the circumstances, time and place and the job is established.
- Occupational diseases count for employments and diseases listed in the Code’s schedules, typically after six months of continuous service with the same employer.
- Serious accidents must be reported to the competent authority within seven days.
Chapter VII applies to employees in the wide range of employments listed in a schedule to the Code, covering factory, construction, transport, loading, warehousing and similar work. Employees covered by ESI are handled differently: their work injuries are compensated through ESI’s employment-injury benefits, not by the employer under this chapter.
The Size Of The Liability
How much compensation the law requires
| Outcome | Compensation under section 76 |
|---|---|
| Death | 50% of monthly wages × the relevant factor for the employee’s age, or the amount notified by the Central Government, whichever is higher |
| Permanent total disablement | 60% of monthly wages × the relevant factor, or the notified amount, whichever is higher |
| Permanent partial disablement | A percentage of the total-disablement amount, by the schedule or by the assessed loss of earning capacity |
| Temporary disablement | A half-monthly payment of 25% of monthly wages, for up to five years |
| Medical expenses | Actual medical expenses reimbursed by the employer |
| Funeral expenses (on death) | At least ₹15,000, or more if the State prescribes |
The relevant factor comes from the Sixth Schedule to the Code and falls with age: it is 216.91 at 25, 207.98 at 30, 184.17 at 40 and 153.09 at 50. That is why the liability for a young worker is so large.
| Worked example: employee aged 30, monthly wages ₹20,000 | Amount |
|---|---|
| Death: 50% × ₹20,000 × 207.98 | ₹20.80 lakh |
| Permanent total disablement: 60% × ₹20,000 × 207.98 | ₹24.96 lakh |
| Plus funeral expenses (death) or medical expenses (injury) | Additional |
The figures are illustrative. The Central Government can notify the monthly wage figure to be used in the calculation, which may produce a lower amount for higher earners. Even so, one serious accident can cost more than a small business earns in a year. Compensation paid late can also attract interest and a penalty, decided by the competent authority.
The one rule that matters most: insure every category of worker you actually have, on their actual wages. The policy is priced and written on the employees and wages you declare. Under-declare to save premium, and you invite a disputed claim, with the gap coming out of your own pocket.
The Insurance
How a workmen compensation policy works
- What it pays: the compensation you are legally liable for under the Code, as decided by the competent authority or agreed under it. Common extensions add medical expenses, occupational disease and legal costs.
- How it is priced: by the number of employees in each job category and their wages. Rates rise with risk, so an office worker costs far less to cover than a loader, welder or driver.
- How it is adjusted: many policies are written on estimated wages and adjusted at the end of the year to the wages actually paid, so declare honestly and keep payroll records.
- Contract labour: a principal employer can be liable for injuries to a contractor’s workers. Either ask contractors for proof of their own WC cover, or extend your policy to include them.
- Who must have it: the policy is not compulsory for most private employers, but contractors on government and large private projects are often required to produce one.
The premium is a business expense, generally deductible under the general deduction in section 34 of the Income-tax Act, 2025 (formerly section 37).
Who Needs It
Does your business need workmen compensation insurance?
Ask three questions. Do you employ people in manual, site, factory, warehouse, transport or delivery work? Are any of them outside ESI, because the establishment is not covered or because their wages are above the ESI ceiling? Do you engage contractors whose workers come onto your premises? If the answer to any of these is yes, the liability is real and usually far larger than the premium.
Workmen compensation sits alongside other employee cover rather than replacing it. Group health insurance pays hospital bills for any illness or injury, at work or not. Workmen compensation pays the statutory compensation for work injuries and deaths. A business with a manual workforce usually needs both.
Avoid These
Common workmen compensation mistakes
1. Declaring fewer workers or lower wages
Under-declaration lowers the premium and the protection together. A worker or wage bill that was not declared gives the insurer grounds to dispute or reduce the claim, and the employer carries whatever is not paid.
2. Forgetting contractors’ workers
An injured contract labourer can claim against the principal employer if the contractor does not pay. Check contractors’ policies every year.
3. Using wrong job categories
Listing a loader as a supervisor to save premium can lead to a disputed claim. Classify each role by what the person actually does.
4. Ignoring the commuting rule
Under the Code, accidents on the way to or from work can be claimed. Make sure the policy wording responds to the Code’s liability, not just the old Act’s.
Talk It Through
Covering your workforce for workplace accidents?
Tell us how many people you employ in each kind of work and their monthly wages. We will help you set the right categories and wages, include contract labour where needed, and arrange the policy through a licensed insurance agency. For businesses in Ranchi, Deoghar and across India online. No cost to talk.
Key takeaways
→ Workmen compensation insurance pays the employer’s legal liability when an employee is injured, disabled or killed at work, or contracts an occupational disease.
→ Since 21 November 2025 the liability is in Chapter VII of the Code on Social Security, 2020, which replaced the Employees’ Compensation Act, 1923, and now covers some commuting accidents.
→ Death compensation is 50% of monthly wages × an age-based factor (207.98 at age 30), or a notified minimum if higher: over ₹20 lakh for a 30-year-old earning ₹20,000 a month.
→ The insurance is not compulsory for most private employers, but the liability is. Contractors on many projects must show a policy.
→ Declare every job category and actual wages, and cover contract labour. ESI-covered employees are compensated through ESI instead.
Questions
Frequently asked questions
Is workmen compensation insurance mandatory in India?
For most private employers, no. The duty to pay compensation under the Code on Social Security, 2020 is mandatory; the insurance is the usual way to fund it. Many government and large private contracts require contractors to hold a policy.
Which law governs workmen compensation now?
Chapter VII of the Code on Social Security, 2020, in force from 21 November 2025. It replaced the Employees’ Compensation Act, 1923.
How is compensation for death calculated?
Under section 76 of the Code, it is 50% of the employee’s monthly wages multiplied by the relevant factor for their age from the Sixth Schedule, or the amount notified by the Central Government, whichever is higher. The employer must also deposit at least ₹15,000 towards funeral expenses.
Are accidents while travelling to work covered?
They can be. Section 74(4) of the Code treats an accident while commuting between home and the place of work as arising out of employment, where a link between the circumstances, time, place and the employment is established.
Do employees covered by ESI need workmen compensation insurance?
Their work injuries are compensated through ESI’s employment-injury benefits, so the employer is not liable under Chapter VII for them. Employees outside ESI still need to be covered.
Is the premium tax deductible?
Generally yes, as business expenditure under section 34 of the Income-tax Act, 2025 (formerly section 37).
Keep Learning
Next steps: Group health insurance · Employer-employee insurance scheme · Keyman insurance · Shop insurance
The bigger picture: The business insurance guide · The complete guide to insurance in India
About the author
Ujjwal Tiwary
ARN-144500 · NISM Series V-A certified since 2018 · Ranchi & Deoghar, Jharkhand
Ujjwal Tiwary is an AMFI-registered mutual fund distributor (ARN-144500) based in Ranchi and Deoghar, Jharkhand, and has held the NISM Series V-A certification since 2018. He works with families on mutual funds, insurance and income tax returns, and writes or personally reviews every article on FactFinances. He is not a SEBI-registered investment adviser; nothing on this site is personalised advice.
Disclaimer: FactFinances provides educational content only. This article is for general information and is not insurance, tax, financial or legal advice, and does not recommend any specific product or insurer. Disclosure: Insurance is the subject matter of solicitation. Insurance products are arranged through a licensed insurance agency; the policy is issued and underwritten by the respective insurer, and claims are settled by the insurer as per the policy terms. The agency receives commission from insurers, included in the premium. Read the sales brochure and policy wording carefully before concluding a sale. This article is not legal advice on labour law. It summarises Chapter VII of the Code on Social Security, 2020, as understood at the time of writing; rules, notified amounts and state-specific provisions under the Code continue to be issued, so check current notifications and take advice for your establishment. Policy coverage, extensions and premiums are decided by the insurer. ARN-144500. Regulatory information: IRDAI.