While the government has hiked the wage ceiling for mandatory coverage under the Employees’ Provident Fund Organisation (EPFO) to Rs 25,000 monthly, the amount credited to the employee’s EPF accounts per month is set to reduce by the extent of the increase in Employees Pension Scheme (EPS) contribution.
The contribution to EPS—a pension pool—will increase by Rs 833 a month. While the overall EPF kitty may reduce, employees will get a higher monthly pension as it is linked to pensionable wages and pensionable service under the EPS formula. The EPS does not offer any interest and upon 10 years of unbroken contribution, the subscriber will get pension on turning 58.
Puneet Gupta, partner, People Advisory Services, Tax, EY India, says where EPF contributions are already being made on full wages, an increase in the EPF wage ceiling will not change the overall EPF contribution made by either the employer or the employee. The allocation of the employer’s contribution to EPS will increase from Rs 1,250 per month (8.33% of Rs 15,000) to Rs 2,083 per month (8.33% of Rs 25,000). “Consequently, the amount credited to the employee’s EPF account would reduce to that extent,” he says.
Pension will rise
The hike in the wage ceiling will boost pension payouts. As the monthly pension under EPS is calculated as (pensionable salary × pensionable service) / 70, assuming the maximum pensionable service of 35 years, the maximum monthly pension would increase from Rs 7,500 to Rs 12,500. This represents a potential increase of Rs 5,000 per month in the pension payable under the revised wage ceiling.
However, the actual increase would depend on factors such as the period of coverage, pensionable service and average pensionable wages. “The benefit of pension will be greater for employees who have a longer period of pensionable service,” says Sandeep Sehgal, Partner-Tax, AKM Global.
Higher insurance coverage
The wage ceiling hike will also enhance the insurance coverage under the Employees’ Deposit Linked Insurance Scheme (EDLI), which provides financial protection to the dependents of a deceased member and is funded through an employer contribution of 0.5% of wages, subject to the statutory wage ceiling.
Under the existing Rs 15,000 wage ceiling, the maximum EDLI benefit is Rs 7 lakh. With the new wage ceiling, it will increase to Rs 10.50 lakh. This would increase the insurance benefit available to eligible members’ families in the event of death during service. “Since the death benefit is computed as a multiple of wages subject to the ceiling, the maximum assured sum will rise,” says Avneet Singh, associate partner, Nangia and Company.