Rules 3-4 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Rule 3 lays down how an employer whose establishment was brought under the PF or ESI Chapter by agreement can ask to come out. Rule 4 sets the income limit for dependent parents to count as "family" for ESI purposes.
Rule 3: an employer and a majority of employees who agreed to voluntary coverage under s.1(5) (PF) or s.1(7) (ESI) may apply electronically to the Central Provident Fund Commissioner or the Director General. The application is deemed granted after 60 days of silence, but not before five years of coverage, and only with all returns filed and dues paid. Rule 4: dependent parents count as family if their income from all sources does not exceed Rs 14,000 a month or an amount notified.
Background: voluntary coverage under section 1
Section 1(4) makes the applicability of Chapters specified in the First Schedule. Section 1(5) then allows the Central Provident Fund Commissioner, where the employer and a majority of employees agree, to apply Chapter III (provident fund) to an establishment by notification. Section 1(7) does the same for Chapter IV (ESI) through the Director General of the Corporation. Each has a proviso: if the employer wishes to come out, he may apply, and the Commissioner or Director General, if satisfied there is agreement between the employer and the majority of employees, makes the Chapter inapplicable "in such manner and subject to such conditions as may be prescribed by the Central Government". Rule 3 is that prescription.
Establishments that are covered by the First Schedule's own thresholds, or under s.1(4), cannot use this route. If you are unsure how your establishment came under the Code, our ESI and PF registration team can trace it from your registration history.
Rule 3: the procedure step by step
- Who applies: the employer of an establishment to which Chapter III or IV was applied under s.1(5) or s.1(7) (rule 3(1)).
- How: electronically on the specified portal, to the Central Provident Fund Commissioner (Chapter III) or the Director General (Chapter IV).
- Condition: the employer and the majority of the employees must agree in writing to the request.
- Decision time: the Commissioner or Director General decides within sixty days of receipt (rule 3(2)).
- Deemed grant: if no decision is taken within sixty days from the date of the application, the permission "shall be deemed to have been granted with effect from the date of completion of such sixty days".
The bars on applying
| Bar | What rule 3 says |
|---|---|
| Later compulsory coverage | No application is entertained if the Chapter became applicable under s.1(4) at any time after the s.1(5) or s.1(7) notification |
| Five-year wait | No application before five years of coverage under Chapter III or IV |
| Dues and returns | No application unless the employer has furnished all returns, paid all dues under the Code and filed a self-certification to that effect with the application |
The later-compulsory-coverage bar is the subtle one. An establishment that came in voluntarily, but then crosses the threshold that makes the Chapter apply under the First Schedule, cannot exit by agreement.
A worked example
A 12-person firm came under Chapter IV by agreement with the majority of its staff and was notified under s.1(7). Four years later the owner wants to leave the scheme. Rule 3 bars an application before five years of coverage. After five years, the owner may apply electronically to the Director General, upload the employees' written consent and a self-certification that all returns are filed and all dues paid. If there is no decision within sixty days, permission is deemed granted from the day the sixty days end. If even one return is pending, the application will not be entertained. (Illustrative.)
Rule 3 does not state a form number in the text we read; the application is made on "the specified portal". Check the portal's current procedure before filing.
Rule 4: income of dependent parents
Section 2(33) defines "family" for an employee or unorganised worker. Clause (e) includes "dependent parents (including father-in-law and mother-in-law of a woman employee), whose income from all sources does not exceed such income as may be prescribed by the Central Government". Rule 4 prescribes it: for the purposes of sub-clause (e) of clause (33) of section 2, "the income from all sources, for the purposes of Chapter IV of the Code shall not exceed fourteen thousand rupees in a month or such amount as may be specified by notification".
Key points:
- The limit is per month and covers income from all sources.
- It applies "for the purposes of Chapter IV", that is, ESI. It decides whether a parent is part of the insured person's family for medical benefit and related rights.
- The limit can be changed by notification, so employers should not hard-code it into HR policies.
- It covers parents and, for a woman employee, parents-in-law.
A worked example
An insured woman's mother-in-law has a pension of Rs 9,000 a month and rental income of Rs 4,000 a month, so her income from all sources is Rs 13,000. Within Rs 14,000, she can be treated as a dependent parent under clause (e). If rental income were Rs 6,000, her income would be Rs 15,000 and she would fall outside the family as defined, unless the limit is raised by notification. (Illustrative; dependency and other family conditions must also be met.)
Employers updating declaration forms on the ESI portal should ask for parents' income details where a parent is being added.
Need help with ESI or PF applicability?
Whether to stay in or exit voluntary coverage, and how to record dependents correctly, are both decisions with consequences for employees. Our ESI and PF registration practice can review your coverage position and prepare the application and supporting papers.
Key takeaways
- Rule 3 lets an employer exit voluntary PF or ESI coverage under s.1(5) or s.1(7).
- Employer and majority of employees must agree in writing; apply electronically.
- Decision in 60 days, otherwise deemed granted.
- No application before five years, and none without all returns and dues cleared plus a self-certification.
- Rule 4: dependent parents' income limit is Rs 14,000 a month or as notified.
Read next
- Rules 1 and 2: Short title, commencement and definitions
- Rule 5: Registration of establishments
- First Schedule: Applicability of Chapters
- Applicability of ESI and the wage limit
Disclaimer: Based on the Code on Social Security, 2020 (as enacted) and, where noted, the Code on Social Security (Central) Rules, 2026 (G.S.R. 344(E), 8 May 2026), as on 30 September 2026. The Code is in force from 21 November 2025; some provisions may be notified later, and State Governments make their own rules for establishments where the State is the appropriate Government. Verify the current position before acting.