look news india
There has been a major change on the social security front for crores of salaried employees in the organized sector and the youth who have entered new jobs. The approval process has progressed towards increasing the statutory wage ceiling for mandatory contribution under the Employees’ Provident Fund Organization (EPFO) from ₹ 15,000 to ₹ 25,000 per month. This amendment is being implemented after the year 2014 i.e. after a long gap of about 12 years, when the then government had increased this limit from ₹6,500 to ₹15,000.
In view of rising inflation, cost of living and increased minimum pay scales in the private sector, revision of this limit was being recommended by the Ministry of Labor and Employment and the Central Board of Trustees (CBT) for a long time. With this policy decision, lakhs of new employees of the formal workforce across the country will be able to directly join the social security ambit of EPFO, who till now were left out of the mandatory PF coverage due to their basic salary being more than ₹ 15,000.
Under the Employees Provident Fund rules, a contribution of 12-12 percent of the basic salary and dearness allowance (DA) is deposited by each employee and his employer company. Due to increase in the salary limit, the base of this mandatory calculation will become ₹ 25,000 instead of ₹ 15,000.
The direct monthly change in each account under this new slab will be as follows:
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Employee’s EPF Contribution: The entire 12% of the employee’s share is deposited directly into the Employee Provident Fund (EPF) account. This was a maximum of ₹1,800 per month at a limit of ₹15,000, which now increases to a limit of ₹25,000. ₹3,000 per month Will be done.
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Company (Employer) Contribution: The employer’s 12% share is divided into two parts:
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8.33% share (Employees’ Pension Scheme – EPS): Earlier the maximum deduction was ₹ 1,250, which has now increased. ₹2,083 per month Will be done.
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3.67% share (EPF account): Earlier it used to be ₹550, which has now increased ₹917 per month Will be done.
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Total monthly deposit in PF fund: The total amount going directly into the PF account of employee and employer will increase from ₹ 3,600. ₹6,000 per month But will reach.
This increase in the salary limit will have a mixed impact on the in-hand salary (take-home pay) of every employee. For employees whose cost-to-company (CTC) model is fixed, the structure of deduction in their salary slips will change.
Employees whose basic salary is more than ₹ 15,000 (e.g. ₹ 25,000 or more), but their company used to deduct PF only at the minimum ceiling of ₹ 15,000, will now have an additional ₹ 1,200 deducted from their pockets every month towards PF. Additionally, the employer’s additional contribution of ₹1,200 can also be adjusted from the gross pay if it is part of CTC. This will result in an immediate reduction of approximately ₹1,200 to ₹2,400 in the employee’s monthly in-hand salary. However, this deduction is not a loss, rather this money will be compounded by being safely deposited in a provident fund account with an interest rate of 8.25% guaranteed by the government.
The most revolutionary and far-reaching impact of this decision will be visible on the monthly pension received under the Employees’ Pension Scheme 1995 (EPS-95). EPS pension is determined by a fixed formula based on pensionable salary and total years of service:
$$\text{Monthly Pension} = \frac{\text{Pensionable Salary} \times \text{Service Years}}{70}$$
Till now, the maximum pensionable salary in this formula was capped at ₹15,000, due to which no employee could get a monthly pension of more than ₹7,500 even after completing a maximum service of 35 years.
Now as soon as the base salary becomes ₹25,000, the range of pensionable salary will increase by 66.67%. The direct result of this will be that the maximum monthly pension of employees who have completed 35 years of service will directly increase from ₹ 7,500. ₹12,500 per month It will be done. Lakhs of employees who have completed 20 to 30 years of service will also get the benefit of additional guaranteed monthly pension of ₹3,000 to ₹4,500 for life in proportion to their service period.
This border amendment will change the rules for both industries and employees:
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Mandatory Coverage for New Employees: Now it will be legally mandatory for every new employee with a basic salary up to ₹ 25,000 to become a member of EPFO, in any organization having more than 20 employees.
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Increase in EDLI life insurance: The maximum life insurance cover available under the Employees Deposit Linked Insurance (EDLI) scheme available with EPF is also decided on the basis of salary limit. Increasing the salary limit will also increase the amount of insurance protection provided to the employee’s dependents in case of any untoward incident.
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Liabilities of companies will increase: The financial burden on small and medium enterprises (MSMEs) towards their employees’ statutory PF contribution will increase as employers may have to bear an additional monthly contribution of ₹1,200 per eligible employee.
The move to raise the EPFO salary limit to ₹25,000 may reduce cash flows a bit in the short term, but in the long run, it will prove to be an unprecedented boost to the retirement fund, pension security and social empowerment of the Indian workforce.