The Union Cabinet on Wednesday approved raising the wage ceiling for mandatory coverage under the Employees’ Provident Fund Organisation (EPFO) to Rs 25,000 per month from Rs 15,000, the first revision in the threshold since September 2014.
The decision to raise the ceiling reflects the “sustained wage growth, rising incomes and a continued expansion of formal employment over the intervening years,” the labour ministry said.
The higher ceiling is expected to bring in 5-10 million employees under mandatory EPFO coverage, widening social security coverage. For those with salary above the ceiling, EPF contributions are voluntary.
With a Rs 25,000 wage ceiling, the monthly pension contribution will be capped at Rs 2,082 from Rs 1,250 earlier.
The higher wage ceiling will be effective Thursday, after which a fresh employee joining employment at a wage up to Rs 25,000 per month will be automatically covered under the EPF framework and will be part of the mandatory provident fund, pension and associated insurance protection.
The average wage of a regular salaried worker in India is Rs 23,000, while the minimum wage in some states is higher than Rs 15,000, the ministry said.
The latest EPFO data show around 79.8 million contributing members across about 0.77 million contributing establishments, while the employees’ pension scheme (EPS) provides pension benefits to around 8.2 million people.
The revised wage ceiling will cost the government around Rs 11,339 crore (assuming 5.1 million employee additions), against the existing annual budgetary support of about Rs 10,250 crore. The estimated expenditure over five years is approximately Rs 56,696 crore.
The higher wage ceiling will enhance retirement savings and social security coverage for employees. It will expand access to provident fund savings, pension protection under the EPS and insurance protection under the Employees’ Deposit Linked Insurance Scheme (EDLI), the ministry said.
However, it will also have a direct cost implication for employers through higher PF, pension and EDLI contributions, said Puneet Gupta, Partner, People Advisory Services-Tax, EY India. “Employees in the affected salary bracket are also likely to witness a reduction in take-home pay due to the higher employee PF contribution,” Gupta said.
The total EPF contribution for a worker, on average, is likely to rise by Rs 600 per month, labour ministry officials said.
Both employers and employees contribute 12% of the employee’s basic salary and dearness allowance every month to the provident fund. The employee’s share goes to the EPF account. In cases where mandatory EPF is applied, of the employer’s 12% contribution, 3.67% goes to EPF and 8.33% to EPS. The government contributes 1.16% for an employee’s pension under the mandatory scheme.
“Since the wage ceiling was last revised in September 2014, India has witnessed sustained wage growth, rising incomes and continued expansion of formal employment. In several States and occupations, minimum wages have also moved closer to the existing threshold. The enhancement to Rs 25,000 therefore updates the EPFO framework in line with rising wage levels and extends the benefits of formal social security to a wider segment of the workforce,” the government said.
“The decision reflects the need to align social security thresholds with current wage levels and inflationary trends. That said, employers should await the formal notification and review the detailed implementation provisions before assessing the full impact, as the official notification giving effect to the revised wage ceiling is still awaited,” Gupta said.