EPF, EPS contribution limit may be hiked: Impact on salary explained

The central government may soon raise the wage ceiling under the Employees’ Provident Fund (EPF) scheme from Rs 15,000 to Rs 21,000, impacting contributions towards EPF and the Employees’ Pension Scheme (EPS). This adjustment, reported by The Economic Times, is seen as a step towards improving social security for workers by broadening EPFO coverage.

 

The current ceiling has remained unchanged since it was last updated in 2014, when it was doubled from Rs 6,500 to Rs 15,000.

 

This adjustment, if implemented, will lead to changes in the contribution amounts both by employees and employers towards retirement and pension savings.

 

 

How will a higher EPF wage ceiling affect your salary?

 

A higher wage ceiling will influence both the benefits and deductions within your salary structure. Here’s a breakdown:

 

Benefits for employees

 

Enhanced pension payouts and savings: “Due to the revised wage ceiling, contributions to the EPS will increase, which could lead to higher pension payouts at retirement. Additionally, contributions towards EPF will increase, which bolsters the retirement corpus,” says Kinjal Champaneria, Partner at Solomon & Co.

 

Improved social security: With higher contributions channelled into the provident fund schemes, employees will enjoy a more secure financial safety net, aligning with the EPF Act's objectives.

 

Drawbacks for employees

 

Increased salary deductions: “Under Section 6 of the EPF Act, the employee’s contribution to EPF is fixed at 12% of basic wages. With the raised wage ceiling, employees will face higher salary deductions, reducing their net take-home salary. This could strain employees earning close to the wage ceiling, as the mandatory contributions would increase,” explains Champaneria.

 

Consider an employee earning a basic salary of Rs 23,000. Under the proposed Rs 21,000 wage ceiling, the EPF contribution structure would adjust as follows:

 

Employee’s EPF contribution: The employee contributes 12% of Rs 23,000, equating to Rs 2,760 per month.

 

Employer’s EPF and EPS contribution:

Total employer contribution remains at 12% of Rs 23,000, or Rs 2,760.

Of this, 8.33% of Rs 21,000 (Rs 1,749) goes towards the employer’s EPS contribution, while the remaining 3.67% (Rs 1,011) contributes to the EPF.

 

“As the EPS contributions increase due to the new wage ceiling, EPF contributions decrease, enhancing the pension corpus over time,” says Champaneria.

 

This formula applies with the wage ceiling in effect, impacting the final pension based on service tenure and average earnings.

 

What will you earn at the time of retirement if the ceiling is revised?

 

If you are 35 years old now, plan to retire at 58, and earn a monthly salary of Rs 23,000, here’s what you can expect to receive as your pension after retirement:

 

1. Years of service: 23 years (from age 35 to 58)

2. Eligible salary: Rs 21,000 (the revised wage ceiling)

 

The pension amount under EPS is calculated as:

 

Pension = (years of service × pensionable salary) / 70

 

So, the estimated monthly pension at age 58 would be approximately Rs 6,900, with the increased ceiling limit. Without the increased ceiling limit, you will earn approximately Rs 4,929 per month.

 

The increase falls under the Employee Provident Fund & Miscellaneous Provisions Act, 1952 (EPF Act), enabling the government to revise the wage ceiling via official notification. The specific ceiling for EPF and EPS contributions is outlined in Paragraph 26A of the Employees' Provident Fund Scheme, 1952, which defines the maximum monthly wage for mandatory contributions.