The Cabinet last month raised the wage ceiling eligibility for Employees Provident Fund (EPF) coverage by ₹10,000, from the ₹15,000 set in 2014, Union Information and Broadcasting Minister Ashwini Vaishnaw said.
The hike, which comes after 12 years, seeks to “reflect sustained wage growth, rising incomes and continued expansion of formal over the intervening years”, the minister said.
Will your EPF contribution increase?
For employees whose EPF contribution was earlier restricted to the ₹15,000 ceiling, the employee contribution can increase. See illustration below:
- Earlier employee contribution: 12% × ₹15,000 = ₹1,800/month
- New employee contribution: 12% × ₹25,000 = ₹3,000/month
- Additional from salary: ₹1,200/month
- Potential annual reduction in take-home pay: ₹14,400
The employer’s statutory contribution in such a case would also increase from ₹1,800 to ₹3,000. However, the actual impact on an employee’s take-home will depend on how the employer structures the salary and calculates PF contributions.
How does this impact social security coverage?
The wage ceiling for membership to the Employees’ Provident Fund Organisation () has been raised to ₹25,000 per month, bringing an additional 51 lakh employees under mandatory provident fund cover, and widening social security coverage for workers.
Notably, the EPFO also administers pension under the Employees’ Pension Scheme (EPS) and insurance protection under the Employees’ Deposit Linked Insurance Scheme (EDLI). Hence, benefits under these heads are also likely to be enhanced.
The latest EPFO data shows around 7.98 crore contributing members across about 7.68 lakh contributing establishments, while the provides pension benefits to around 82 lakh pensioners.
EPS: Pension to be hiked?
The EPFO’s pension benefit is available to all subscribers who have had an account for more than 10 years. Under this, 8.33% of the 12% employer contribution to your account is directed towards your EPS account. Further, the government also contributes 1.16% (subject to wage ceiling) towards the fund.
Thus, with both the employer and government contributions subject to the wage ceiling, the total accumulated corpus towards your final pension will increase, subject to formula remaining unchanged. Notably, pension is calculated using the past five years average salary (subject to wage ceiling). So, to fully reap benefit of the higher bracket, you must have at least five years of service with the increased wage ceiling. Formula is as follows: Pension = (Pensionable Salary (average of last 60 months) x Pensionable Service) / 70.
EDLI: Insurance benefits could increase
As per the rules, is calculated using the user’s monthly salary over the last 12 months, based on their applicable wage ceiling, plus a component tied to the average EPF balance. Under the previous wage ceiling, the maximum payout was ₹7 lakh, as follows: ( ₹15,000 (last 12 months wage ceiling) × 35 (years of service)) + ₹1.75 lakh (assured payout) = ₹7 lakh
With the wage ceiling hike, total would now increase as follows: ( ₹25,000 × 35) + ₹1.75 lakh = ₹10.5 lakh. However, this figure is only an estimate, based on the assumption that the government calculates EDLI using the same formula and keeps the ₹1.75 lakh component unchanged.
For employers’ contribution, EY noted that this contribution towards EDLI is 0.5% of wages.
- Earlier maximum contribution: 0.5% × ₹15,000 = ₹75/month
- New maximum EDLI contribution: 0.5% × ₹25,000 = ₹125/month
Disclaimer: This story is for educational purposes only. We advise investors to check with certified experts before making any investment decisions.