[Analysis] Assessment, Recovery and Compliance under Code on Social Security 2020 – Section 125 | Appeals | Penalties

Assessment, recovery and compliance under the Code on Social Security 2020 sit in Chapter XI, sections 122 to 132, with the offences in Chapter XII. Section 125 replaces section 7A of the EPF Act and section 45A of the ESI Act, and bars a proceeding from being initiated more than five years after the amount fell due. The pre-deposit on an appeal to the Tribunal falls from seventy-five per cent to twenty-five. Section 137 requires the authority to give an employer a written chance to comply before any prosecution is launched.

Law stated as on 1 September 2026. The Code on Social Security, 2020 was brought into force in stages, the bulk of it with effect from 21 November 2025.

Table of Contents

1. Where compliance now sits
2. The Inspector-cum-Facilitator and the inspection scheme
3. Records, wage slips and returns
4. The rule that stops you passing the cost on
5. Assessment under section 125, and the five-year limit
6. Two appeals, two different doors
7. Interest, damages and the VISHWAS window
8. Recovery: certificate, arrest and the Income-tax machinery
9. The second chance in section 137
10. Compounding, and the gap it leaves
11. Frequently asked questions
12. Conclusion

1. Where compliance now sits

Under the old regime an employer facing a provident fund demand was in section 7A of the EPF Act; facing an ESI demand, in section 45A of the ESI Act; facing a gratuity dispute, somewhere else again. Each Act carried its own assessment provision, its own appeal, its own recovery machinery and its own penalties.

The Code on Social Security, 2020 puts all of it in two chapters. Chapter XI, headed “Authorities, Assessment, Compliance and Recovery”, runs from section 122 to section 132. Chapter XII, “Offences and Penalties”, runs from section 133 to section 138.

The entitlements did not move. The machinery did, and that is where the work now is. An employer who knows the old Acts well will recognise every benefit and almost none of the procedure. Our note on the nine Acts subsumed in the Code traces the wider mapping.

2. The Inspector-cum-Facilitator and the inspection scheme

Section 122 renames the inspector and, more importantly, constrains him. An Inspector-cum-Facilitator discharges his duties and exercises his powers in accordance with the inspection scheme laid down under sub-section (2). He does not set his own agenda.

Two features of that scheme matter to an employer:

• Web-based inspection. Section 122(2) allows the Government to notify a scheme providing for generation of a web-based inspection and calling of information electronically, with provisions to cater to special circumstances for assigning inspections and calling for information.
• Randomised selection. Section 122(3) allows the Government to confer on Inspector-cum-Facilitators a jurisdiction of randomised selection of inspection.

Between them these replace the discretionary visit with an allocated one. The practical consequence is documentary rather than behavioural: if inspection is generated electronically and information is called for electronically, the quality of what is on the system at the moment the call comes is what determines the outcome.

3. Records, wage slips and returns

Section 123 sets out four obligations, and the first is the long one. An employer must maintain records and registers, electronically or otherwise, in the prescribed form, containing particulars including:

• number of days and number of hours of work performed by employees;
• wage paid; leave, leave wages, wages for overtime work and attendance;
• the employee identification number, by whatever name called;
• the number of dangerous occurrences, accidents and injuries for which compensation has been paid, and the amount, in respect of Chapter IV and Chapter VII respectively;
• statutory deductions made from wages in respect of Chapter III and Chapter IV;
• details of cess paid on building and other construction work;
• the total number of employees, distinguishing regular, contractual and fixed-term employment, on the day specified;
• persons recruited during a period, their occupational details, and vacancies for which suitable candidates were not available.

The employer must also display notices at the workplace, issue wage slips to employees in electronic or other form, and file returns electronically or otherwise. A proviso routes the Chapter III version of all this into the Provident Fund, Pension and Insurance Schemes rather than into Central Government rules, so a payroll team looking for the applicable form should look at the scheme, not the rules.

The last three items on that list are worth noticing. Occupational details, recruitment in a period, and unfilled vacancies are employment-market data, not social security data. They are there because Chapter XIII absorbed the Employment Exchanges Act, and section 123 is now doing that Act’s reporting work as well.

4. The rule that stops you passing the cost on

Section 124 is one sentence and it is the most commercially consequential provision in the chapter right now.

No employer of a covered establishment shall, by reason only of his liability for the payment of any contribution or charges under the Code, reduce, whether directly or indirectly, either the wages of any employee, or the total quantum of benefits to which that employee is entitled under the terms of his employment, express or implied.

Read that against the new definition of wages in section 2(88), whose first proviso adds excluded allowances back into the wage base to the extent they exceed one half of all remuneration, or such other percentage as the Central Government may notify. For a great many employers the contribution bill went up on commencement without anything else changing. Section 124 closes the obvious response. Restructuring a salary so that the employee’s take-home absorbs the increased contribution is a reduction of wages by reason of the liability, and doing it through allowances rather than basic pay does not help, because the section catches indirect reduction and reaches the total quantum of benefits as well.

Section 124 corresponds to section 72 of the ESI Act, 1948 and section 12 of the EPF Act, 1952. Both said the same thing for their own Act; section 124 now says it across every chapter of the Code, including gratuity, maternity benefit and the building workers’ cess, where no equivalent existed before.

5. Assessment under section 125, and the five-year limit

Section 125 is the successor to section 7A of the EPF Act and section 45A of the ESI Act. The Central Government authorises officers of the Central Board or the Corporation, not below the rank of Group ‘A’ officer, to act as Authorised Officers, who may by order decide a dispute about the applicability of Chapter III or Chapter IV, determine the amount due from an employer, and conduct such inquiry as they think necessary.

Four controls sit around that power, and three of them are new.

Control	What section 125 says	Position under the old Acts
Limitation to start	No proceeding may be initiated after five years from the date the dispute is alleged to have arisen or the amount is alleged to have become due	Section 7A had none. Section 45A barred an order covering a period beyond five years from when the contribution became payable, which is a different bar
Time to finish	Inquiry to be held on a day-to-day basis as far as practicable, with an endeavour to conclude within two years; extendable by up to one year on recorded reasons	No statutory timetable
Pending inquiries	Inquiries pending immediately before commencement to be concluded within not more than two years from 21 November 2025	No equivalent
Hearing	No order unless the employer is given a reasonable opportunity of representing his case	Substantially the same

The extension is not automatic. Where the two years run out, the Authorised Officer must record the circumstances and reasons and submit them to the Central Provident Fund Commissioner or the Director General of the Corporation, who may then grant up to one further year. Three years is therefore the outer limit on an inquiry that starts inside the five-year window.

Section 125(3) gives the Authorised Officer the powers of a civil court for enforcing attendance and examination on oath, discovery and production of documents, receiving evidence on affidavit, and issuing commissions for the examination of witnesses. The inquiry is deemed a judicial proceeding within sections 193 and 228, and for the purposes of section 196, of the Indian Penal Code.

Non-appearance has a price. Under section 125(5), where an employer, employee or other person fails to attend without a valid reason, or fails to produce a document or file a report when called upon, the officer may decide applicability or determine the amount due on the evidence adduced and the documents on record. Section 125(6) then allows an employer against whom an ex parte order is passed to apply within three months of communication to have it set aside, on satisfying the officer that the show cause notice was not duly served or that he was prevented by sufficient cause from appearing. A proviso blocks that where the irregularity in service is immaterial because the employer had notice of the hearing date and sufficient time to appear, and an Explanation blocks it altogether once an appeal against the ex parte order has been disposed of on any ground other than withdrawal.

6. Two appeals, two different doors

There is no single appeal provision. The route depends on which chapter the demand came from, and the two routes are not symmetrical.

	Chapter III (provident fund)	Chapter IV (ESI)
Provision	Section 23	Section 126
Appeal lies to	The Tribunal constituted by the Central Government	An appellate authority not below the rank of Joint Director of the Corporation
What may be appealed	Determination and assessment of dues under section 125, and levy of damages under section 128	An order under section 125 relating to Chapter IV
Time limit	As prescribed by the Central Government	Sixty days from the date of the order
Pre-deposit	25% of the amount determined, and only for an appeal against assessment	25% of the contribution ordered, or the contribution on the employer’s own calculation, whichever is higher
Decision timetable	Section 23(4): the Tribunal shall endeavour to decide within one year of the appeal being preferred	Six months from the date of preferring the appeal

Two points repay attention. First, the pre-deposit under section 23(3) has come down from the seventy-five per cent required by section 7-O of the EPF Act to twenty-five per cent. Something went the other way with it, though, and it is easy to miss: section 7-O carried a proviso allowing the Tribunal, for reasons recorded in writing, to waive or reduce the deposit altogether. Section 23(3) has no equivalent. For an employer who would have obtained a waiver, twenty-five per cent with no discretion is worse than seventy-five per cent with it.

Second, section 23(3) attaches the deposit only to an appeal under clause (a), which is assessment. An appeal under clause (b), against a levy of damages under section 128, carries no pre-deposit at all on the face of the section. Where an order does both, the split matters.

On the ESI side the deposit is the higher of the ordered contribution and the employer’s own figure, so an employer who concedes part of the demand cannot deposit only his own smaller number. Against that, section 126 puts the appellate authority under a duty to decide within six months, where section 23(4) only requires the Tribunal to endeavour to decide within a year. And if the employer finally succeeds, the Corporation must refund the deposit with interest as specified in the regulations.

7. Interest, damages and the VISHWAS window

The two are separate liabilities and are calculated separately.

Interest under section 127 is simple interest at such rate as the Central Government notifies, running from the date the amount became due until the date it is actually paid. The Code prints no figure, which is a change from section 7Q of the EPF Act, where twelve per cent per annum was written into the section itself with a power to specify a higher rate in the Scheme. The figure came separately, and twice. Notification S.O. 2357(E), dated 8 May 2026 specifies that for any contribution or any other amount payable under the Code the employer shall be liable to pay simple interest at twelve per cent per annum from the date on which the amount became due till the date of its actual payment. Notification S.O. 2698(E), dated 29 May 2026 specifies the same twelve per cent per annum on any amount due from the employer, and adds that it shall be deemed to have come into force on 21 November 2025. The second is not expressed to supersede the first; what it supplies is the retrospective reach back to the Code’s commencement, so no window is left between 21 November 2025 and 8 May 2026 in which no rate was in force. The rate is therefore the same as it was, but it now sits in a notification that can be changed without amending the Code.

Damages under section 128 are discretionary, punitive and capped. Where an employer defaults in the payment of any contribution under Chapter III or Chapter IV or a scheme, in the transfer of accumulations, or in the payment of any charges, the Central Provident Fund Commissioner, the Director General or an authorised officer may levy and recover damages of an amount not exceeding the amount of arrears. For Chapter III establishments the levying officers were notified by S.O. 2699(E) dated 29 May 2026, in supersession of S.O. 4921(E) of 29 October 2025. The manner of levy is in the regulations for Chapter IV and in the respective schemes for the Provident Fund, Pension and Insurance Schemes.

Two provisos protect the employer. Damages cannot be levied or recovered without an opportunity of being heard. And the Central Board or the Corporation may reduce or waive damages for an establishment for which a resolution plan or repayment plan recommending the waiver has been approved by the adjudicating authority under the Insolvency and Bankruptcy Code, 2016, subject to conditions notified by the Central Government. Section 128 corresponds to section 14B of the EPF Act and section 85B of the ESI Act, and the body of authority on what makes a levy of damages excessive or unsustainable under that section remains directly useful.

VISHWAS, 2026. The Employees’ Provident Funds Scheme, 2026 carries, in its annexure, a set of special provisions relating to damages called VISHWAS, 2026. It is a settlement window rather than a permanent rule, and it is open now.

• It is valid for six months from the date of notification of the Scheme, which was 29 June 2026. The Central Provident Fund Commissioner may extend it by a further period not exceeding six months, for reasons recorded in writing, to be placed before the Central Board.
• It applies to damages for default in payment of contribution for periods before 14 June 2024.
• It covers four situations under section 14B of the repealed Act or section 128 of the Code: an order issued and under dispute before a judicial forum; an order issued but the amount not yet recovered; a notice issued with the final order still to come; and a notice not yet issued at all.
• It does not apply where the entire amount of damages has already been deposited.
• Whatever rate of damages would otherwise have applied, the rate under VISHWAS is the one in paragraph 23(1) of the Scheme.

The consequential provision is the one to weigh. Under sub-paragraph (8), an appeal filed or an order passed under section 7-I of the repealed Act, or before any judicial forum, against such a notice or order stands abated on remittance of the VISHWAS amount. Two conditions attach: the interest under section 7Q of the repealed Act or section 127 of the Code for the corresponding period must be fully remitted or recovered, and the employer must undertake that no further appeal will be filed.

An employer sitting on a section 14B dispute for a pre-June-2024 period is therefore choosing between a pending appeal and a fixed, discounted settlement that closes the matter. That choice has a deadline attached, and on the face of the Scheme the first deadline falls at the end of December 2026.

8. Recovery: certificate, arrest and the Income-tax machinery

Section 129 covers everything that can be owed: any contribution or cess payable, charges, interest, damages, benefit or any other amount. Once it is in arrear, the Authorised Officer or competent authority issues a certificate to the Recovery Officer, electronically or otherwise, and the Recovery Officer proceeds by one or more of three modes:

• attachment and sale of the movable or immovable property of the establishment or of the employer;
• arrest of the employer and his detention in prison;
• appointment of a receiver for the management of the defaulter’s properties.

A proviso imposes an order of resort. Attachment and sale shall first be effected against the properties of the establishment, and only where that is insufficient to recover the whole of the certified amount may the Recovery Officer move against the property of the employer. That sequencing is worth knowing before a personal asset is attached.

Section 132 then borrows an entire enforcement code. The Second and Third Schedules to the Income-tax Act, 1961 and the Income-tax (Certificate Proceedings) Rules, 1962, as in force from time to time, apply with necessary modifications, reading references to the amount in arrears under section 129 in place of income-tax and references to an “assessee” as references to the employer. Anyone advising on a recovery certificate under the Code is, in substance, advising on tax recovery procedure.

9. The second chance in section 137

Section 137 is new, it is short, and it changes the practical exposure of an employer more than any other provision in Chapter XII.

Notwithstanding anything else in the Chapter, the Inspector-cum-Facilitator or other notified officer shall, before initiating a prosecution against an employer for any offence under Chapter XII, give the employer an opportunity to comply by way of a written direction laying down a period for compliance. If the employer complies within that period, no proceeding shall be initiated.

There is one exception, and it is the whole design of the section. No such opportunity is to be given where a violation of the same nature is repeated within three years from the date the first violation was committed. In that case prosecution follows directly.

Two consequences follow for an employer. A written direction under section 137 is not correspondence to be filed; it is the only window in which the offence can still be extinguished by compliance, and its period is the operative deadline. And the three-year repeat rule makes the record of past directions worth keeping deliberately, because whether a second episode is a violation “of the same nature” as a first one is the question that decides whether there is a second chance at all.

10. Compounding, and the gap it leaves

Section 138 allows an offence to be compounded, on an application made either before or after prosecution has been instituted. Three conditions gate it.

• The offence must be committed for the first time.
• It must be either punishable with fine only, or punishable with imprisonment for a term which is not more than one year and also with fine.
• Compounding does not apply to an offence committed a second time or thereafter within three years from the date of commission of a similar offence that was either earlier compounded or earlier resulted in a conviction. Both limbs are in section 138(2), and the conviction limb is the one usually overlooked.

The price is fixed by the section rather than negotiated: half the maximum fine for a fine-only offence, and three-fourths of the maximum fine where the offence carries imprisonment of not more than one year together with a fine.

Now set that against section 133, the provision most employers will actually meet. An employer who fails to pay a contribution commits an offence under section 133(a), and the punishment limb opens by saying he is punishable with imprisonment “for a term which may extend to three years, but”. The two sub-limbs hang off that word. Sub-limb (a) sets a floor of one year for failure to pay an employee’s contribution already deducted from wages, with a fine of one lakh rupees, and sub-limb (b) sets two months extendable to six months in any other case, with a fine of fifty thousand rupees.

Whether a default falling in sub-limb (b) is an offence “punishable with imprisonment for a term which is not more than one year” for the purposes of section 138 is not settled by the drafting. Read against the six-month ceiling in the sub-limb, it plainly is, and compounding at three-fourths of fifty thousand rupees would be available. Read against the opening words of the punishment clause, which speak of three years, it is not. The first reading is the better one, because the word “but” introduces carve-outs that fix both a floor and a ceiling for each limb, so the six-month ceiling in sub-limb (b) displaces the three-year opening. The commentary does not take the point up, so an employer relying on it should expect to have to argue it. Taxmann’s Law & Practice Relating to Code on Social Security prints section 133 and section 138 against their predecessors in the repealed Acts, which is the quickest way to see how much of the ambiguity is inherited and how much is new.

11. Frequently asked questions

What is Section 125 of the Code on Social Security?

Section 125 is the assessment provision. It empowers an Authorised Officer, not below the rank of Group ‘A’ officer of the Central Government, to decide disputes about whether Chapter III or Chapter IV applies to an establishment, to determine the amount due from an employer, and to conduct an inquiry for those purposes. It replaces section 7A of the EPF Act, 1952 and section 45A of the ESI Act, 1948.

Is there a time limit for a PF or ESI assessment?

Yes, and it is new. The proviso to section 125(1) bars initiation of any proceeding after five years from the date the dispute is alleged to have arisen or the amount is alleged to have become due. Section 125(2) then requires an endeavour to conclude the inquiry within two years, extendable by up to one year on reasons recorded and submitted to the Central Provident Fund Commissioner or the Director General. Section 7A of the EPF Act carried no limitation at all. Section 45A of the ESI Act did, but a different one: it barred an order in respect of a period beyond five years from the date the contribution became payable, rather than barring the proceeding from being started.

How much do I have to deposit to appeal a PF or ESI order?

Twenty-five per cent in both cases, but the routes differ. For Chapter III, section 23(3) requires a deposit of twenty-five per cent of the amount determined under section 125 before the Tribunal will entertain an appeal against assessment; the old section 7-O required seventy-five per cent. For Chapter IV, section 126 requires twenty-five per cent of the contribution ordered or the contribution on the employer’s own calculation, whichever is higher, within sixty days of the order.

Can an employer be arrested for non-payment of contributions?

Arrest and detention in prison is one of the three modes of recovery available to a Recovery Officer under section 129(2), alongside attachment and sale of property and the appointment of a receiver. A proviso requires attachment and sale to be effected first against the properties of the establishment, and only where that is insufficient may proceedings move against the employer’s own property.

Can offences under the Code on Social Security be compounded?

Section 138 permits compounding of a first-time offence that is punishable with fine only, or with imprisonment of not more than one year together with a fine, on payment of half the maximum fine in the first case and three-fourths of the maximum fine in the second. It does not apply to a second or subsequent offence within three years of a similar offence that was either earlier compounded or earlier resulted in a conviction. Separately, section 137 requires the authority to give the employer a written opportunity to comply before launching any prosecution at all.

12. Conclusion

Chapter XI reads as a set of constraints on the authority rather than on the employer, which is unusual for a compliance chapter. A five-year bar on starting an assessment, a two-year target for finishing one, a recorded-reasons extension capped at a further year, a hearing before damages, a first-attachment rule that protects personal assets until the establishment’s are exhausted, a written chance to comply before prosecution, and a pre-deposit cut from seventy-five per cent to twenty-five.

Against that, three things got harder. Section 123 asks for more data than any of the repealed Acts did, including employment-market data that used to sit with a different statute. Section 124 forecloses the natural response to a higher contribution bill. And section 132 imports the Income-tax recovery machinery wholesale, so once a certificate issues the employer is on unfamiliar ground.

Two dates belong in the diary. VISHWAS, 2026 runs for six months from 29 June 2026 unless the Central Provident Fund Commissioner extends it, so an employer with a pre-June-2024 damages dispute has until roughly the end of December 2026 to decide whether to settle. And the third proviso to section 125(2) requires every inquiry that was pending on 21 November 2025 to be concluded by 20 November 2027.

Where a specific assessment, damages levy or recovery certificate is live, Taxmann Advisory can take the file. For the chapters the demands come out of, see our notes on EPF under Chapter III and ESI under Chapter IV. The Ministry of Labour and Employment’s Compliance Handbook for Employers under the Four Labour Codes covers the equivalent machinery in the other three codes.