Good news for EPFO subscribers! Union Labour Minister Mansukh Mandaviya has confirmed that the government is looking at raising the limit on contributions made by subscribers every month to the Employees’ Provident Fund Organisation (EPFO) and the Employees’ Pension Scheme (EPS). The Union minister said that the government wants to raise this wage ceiling of Rs 15,000 for employees’ contribution to help them invest more towards their EPF corpus.
“We are trying to increase this limit. We already had meetings…are working on it,” the minister said adding that the motive is to expand the social security net for formal sector workers.
Mandaviya was speaking to reporters about the decisions made by his Ministry in the first 100 days of the Modi 3.0 regime.
FE Online reported last month, citing sources, that the government is considering raising the wage ceiling under the EPFO from Rs 15,000 to Rs 21,000 after the labour ministry sent the proposal to the finance ministry earlier this year.
Once the EPFO wage ceiling is revised, this will have an impact on both EPF and EPS contributions for employees.
The current wage limit for EPFO is set at Rs 15,000 per month, revised from Rs 6,500 in 2014. Under the EPFO, both the employee and employer contribute 12% each to the EPF account for employees earning Rs 15,000 or less each month. At present, the contributions from employee and employer both are payable on the maximum wage ceiling of Rs 15,000.
According to EPFO rules, contributions are based on the employee’s basic salary. Both the employee and employer contribute 12% each to the EPF account. The employee’s whole contribution goes into the provident fund account. But employer’s contribution is divided into two parts – 8.33% is allocated to the Employees’ Pension Scheme (EPS) and remaining 3.67% going into the provident fund account.
How will wage ceiling change impact EPF and EPS contributions of an employee?
At present, the EPF contribution of an employee with a basic salary of Rs 15,000 comes to Rs 1,800. If this wage ceiling is revised to Rs 21,000, this contribution will rise to Rs 2,520.
Likewise, the employer also match the employee’s contribution of 12% but this gets bifurcated and only 3.67% goes towards EPF. At Rs 15,000 basic, the employer is currently paying Rs 550.50 per month, which will go up to Rs 770.70 per month after the proposed revision in EPFO wage ceiling.
How will wage ceiling revision boost your retirement corpus from EPFO?
Suppose an employee joins EPFO scheme at the age of 23 with a basic pay at Rs 15,000 and contributes for next 35 years till he retires at the age of 58. During his entire job period, this employee accumulates a total corpus of Rs 71.55 lakh, earning an interest amount of Rs 60.84 lakh on his own contribution of Rs 10.71 lakh at an interest rate of 8.25% per annum.
Now, let’s see how this calculation changes with a revision in wage ceiling. If this wage limit is hiked to Rs 21,000, the total corpus would reach over 35 years to Rs 1 crore, with interest amount at Rs 85 lakh on own investment of Rs 15 lakh.
Comparing both wage ceiling scenarios, we can see that this employee is set to gain Rs 28.45 lakh in extra EPF corpus on retirement, besides ensuring higher pension under EPS.
Wage ceiling revision to result in higher pension amount
Since the EPS contribution changes with revision in wage ceiling under EPFO, it will also result in a higher pension amount at the time of retirement for EPF subscribers. According to the Employees’ Pension (Amendment) Scheme, 2014, the formula to calculate the EPS pension is as follows:
(Number of years of pensionable service X Average monthly salary for 60 months)/70.
Pensionable service period: Pensionable service refers to the period during which an employee actively contributed to the EPF and EPS accounts.
The formula for calculating the EPS pension was revised by the EPFO in 2014. Before this amendment, the pensionable salary was determined by the average basic salary of an individual’s last year of service.
EPFO hikes withdrawal limit to Rs 1 lakh from Rs 50,000
The Employees’ Provident Fund Organisation has also increased the withdrawal limit from the current Rs 50,000 to Rs 1 lakh.
“If you are an EPFO contributor and if there is some family emergency and if you want to withdraw the PF, the one time withdrawal limit has now been raised,” Mandaviya said at a press briefing on September 17.