“A welfare fund that sits unspent is not welfare — it is deferred promise.” — On India’s construction cess utilisation challenge
The Government of India has formally notified a 1% cess on the total cost of construction incurred by employers, marking a key step in operationalising the Code on Social Security, 2020. The notification, issued by the Ministry of Labour and Employment under Section 100(1) of the Code, supersedes a nearly three-decade-old notification dated 26 September 1996 that had governed the levy under the Building and Other Construction Workers’ Welfare Cess Act, 1996.
Simultaneously, the Social Security (Central) Rules, 2025 were notified on 8 May 2026 via Notification No. G.S.R. 344(E), replacing regulations under multiple older laws dating from 1924 to 2009. This move is part of a broader labour reform drive that has consolidated nine legacy statutes into one unified Code.
📜 From the 1996 Cess Act to the 2020 Code
The legal architecture for levying a welfare cess on construction was originally established by the Building and Other Construction Workers’ Welfare Cess Act, 1996, enacted in August 1996. That Act mandated a cess of not less than 1% and not more than 2% of construction cost. The 1996 notification fixed the operative rate at 1%, funding welfare boards under the companion BOCW (Regulation of Employment and Conditions of Service) Act, 1996.
The Code on Social Security, 2020 (Act No. 36 of 2020) repealed the Cess Act of 1996 along with eight other central labour statutes, including the Employees’ State Insurance Act, 1948; the Employees’ Provident Funds Act, 1952; the Maternity Benefit Act, 1961; the Payment of Gratuity Act, 1972; and the Unorganised Workers’ Social Security Act, 2008. The Code was formulated on the recommendations of the Second National Commission on Labour.
Most operational chapters of the Code came into force on 21 November 2025, followed by a corrigendum on 19 December 2025. The new cess notification brings Chapter VIII of the Code — governing the construction welfare cess — into full operational effect.
Think of this like updating old software. India’s construction workers’ welfare was governed by a patchwork of nine different laws — like nine separate apps doing the same job. The Code on Social Security, 2020 merged all nine into one unified “super-app,” and this cess notification is one of the final pieces needed to actually run it.
✨ Key Provisions of the New Notification
The rate of cess remains unchanged at 1% of the cost of construction, maintaining continuity with the 1996 regime. The levy applies to all commercial buildings regardless of cost. Key changes under the new framework include:
- Raised Exemption Threshold: Individual residential houses costing less than ₹50 lakh are now exempt (effective 21 November 2025), up from the earlier ₹10 lakh limit or 100 sq. metre size threshold — a significant relief for urban homebuilders.
- Self-Assessment Mechanism (Rule 42): Employers pay cess in advance via self-assessment, with construction cost certified by a chartered engineer — defined as a person holding an engineering degree with corporate membership of the Institution of Engineers (India). This replaces the inspector-driven model.
- Reference Rates: For cost calculation, employers may rely on rates specified by the State PWD, Central PWD, or documents filed with RERA.
- Penalty for Delay: Delayed cess payment attracts a penalty of 1% per month on the outstanding amount.
Don’t confuse the exemption thresholds: The OLD limit was ₹10 lakh (or 100 sq. metres). The NEW limit is ₹50 lakh — a 5x increase. Commercial buildings have NO exemption. Also note: the rate of cess is unchanged at 1%; only the residential exemption threshold has changed.
| Aspect | Old Regime (1996 Act) | New Regime (SS Code 2020) |
|---|---|---|
| Cess Rate | 1% (fixed via 1996 notification) | 1% (unchanged) |
| Residential Exemption | ₹10 lakh or 100 sq. metres | ₹50 lakh (effective Nov 2025) |
| Assessment Model | Inspector-driven third-party | Self-assessment by employer + chartered engineer |
| Worker Registration | Manual, state-wise | Aadhaar-linked, centralised portal |
| Migrant Worker Benefits | Linked to state of origin | Portable — benefits in state of current work |
👷 BOCW Welfare Board Structure and Fund Utilisation
Collections from the cess flow into state-level BOCW Welfare Boards, constituted by every State Government. These boards provide registered construction workers with health benefits, accident and disability insurance, financial aid, maternity benefits, pension assistance, and educational support for workers’ children. Workers between 18 and 60 years of age who have worked for at least 90 days in the previous year are eligible to register.
Key statistics as of 1 November 2022:
- Over 5.06 crore construction workers registered with BOCW Boards
- Total cess collected: ₹87,478.79 crore
- Total cess spent: ₹49,269.20 crore
- Unspent corpus: ₹38,209.59 crore
- As of March 2019, only about 39% of total cess collected had been effectively utilised — consistently criticised by the CAG
COVID-19 Test: During the 2020 lockdown, state BOCW boards (then holding ~₹52,000 crore) disbursed ₹4,957 crore in cash assistance to around 2 crore registered construction workers — demonstrating the fund’s emergency safety-net value.
🌍 Integration with Formal Social Security
The Central Government has articulated a plan to integrate BOCW cess collections into the broader formal social security architecture, including eventual linkage to pension schemes and access to ESIC healthcare benefits for construction workers. This would be a structural shift — construction workers have historically been outside the ESIC framework (which covers establishments with ten or more employees).
The digital backbone for this integration is the e-SHRAM portal, launched in August 2021 to create a National Database of Unorganised Workers (NDUW) with Aadhaar-linked records. With over 28.46 crore unorganised workers registered as of December 2022, the framework to channel cess-funded welfare to verified beneficiaries is largely in place.
The new Code also provides that migrant construction workers are entitled to benefits in the state where they are currently working — a significant portability reform over the earlier state-of-origin model.
India’s construction sector is the second-largest employer after agriculture, yet most workers remain outside formal social security. Can a self-assessment cess model — dependent on employer honesty and chartered engineer certification — adequately fund welfare for 5 crore workers? What structural incentives exist for compliance?
⚖️ Challenges and Criticism
Several structural challenges persist despite the reform:
- Self-Assessment Risk: Trade unions fear the shift from inspector-driven to self-certified assessment may lead to underreporting of construction costs, reducing cess collections and welfare funds.
- Registration Barriers: Migrant workers often cannot register with BOCW boards because contractors are reluctant to issue employment confirmation letters, as this triggers compliance obligations under the Inter-State Migrant Workers Act.
- CAG Criticism: The Comptroller and Auditor General has noted that several state boards failed to ensure timely worker registration, deployed welfare funds for non-welfare purposes, and maintained poor beneficiary data.
- Implementation Dependence: The new Aadhaar-linked BOCW registration closes identification and portability gaps on paper, but its effectiveness will depend entirely on state-level administrative capacity.
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The cess is levied under Section 100(1) of the Code on Social Security, 2020 (Act No. 36 of 2020), which superseded the Building and Other Construction Workers’ Welfare Cess Act, 1996.
The new residential exemption threshold is ₹50 lakh (effective 21 November 2025), up from the old limit of ₹10 lakh or 100 sq. metres — a 5x increase.
Rule 42 introduces a self-assessment mechanism for cess payment, with cost certified by a chartered engineer who is a corporate member of the Institution of Engineers (India).
As of 1 November 2022, state BOCW boards had collected ₹87,478.79 crore in cess and spent ₹49,269.20 crore, leaving ₹38,209.59 crore in unspent corpus — a persistent under-utilisation criticised by the CAG.
The Code on Social Security, 2020 consolidated nine earlier central labour laws. It is one of four Labour Codes enacted by Parliament (the others covering wages, industrial relations, and occupational safety).
