New Delhi: Union Labor Minister Mansukh Mandaviya has said the government is considering increasing the monthly contribution cap for subscribers to the Employees’ Provident Fund Organization (EPFO) and the Employees’ Pension Scheme (EPS). 

The government intends to increase the salary cap of Rs 15,000 for employee contributions, according to the Union minister. The Minister said, “We are trying to increase this limit of Rs 15,000.” Mandaviya said discussions about raising the minimum pension under the EPS were ongoing inside the Ministry. The minister said this during the first 100 days of the Modi 3.0 government.

Currently, the pension contribution is set at 8.33% of the maximum wage ceiling, and contributions are payable on the Rs 15,000 maximum wage ceiling. 

Under the Employees’ Provident Funds and Miscellaneous Provisions Act of 1952, companies with 20 or more employees must make provident-fund savings. A minimum of 12% of an employee’s pay is automatically deducted to fund provident funds, with an additional 12% contributed by the employer.

Employees who earn more than Rs 15,000 can choose the percentage of their salary to set aside for pensions and retirement benefits, Mandaviya said in an earlier press briefing.

What will be the impact on EPS and EPF once the EPFO wage ceiling is revised?

The government is considering increasing the EPFO salary cap from Rs 15,000 to Rs 21,000. Contributions made by employees to their EPS and EPF will be affected once the EPFO wage ceiling is revised.

In the case of employees making Rs 15,000 or less per month, the employer and employee each contribute 12% of their monthly earnings to the EPF account under the EPFO. Currently, the maximum wage ceiling of Rs 15,000 applies to both employer and employee contributions.

EPFO rules dictate that employee contributions are based on basic salary with the employee’s whole contribution going into the provident fund account. The employer’s contribution is divided into EPS (8.33%) and provident fund account (3.67%).

The current EPF contribution for an employee with a basic salary of Rs 15,000 is Rs 1,800, but if the wage ceiling is revised to Rs 21,000, the contribution will increase to Rs 2,520.

When the employer matches the employee’s 12% contribution, it gets bifurcated to 3.67% EPF. The current monthly payment by the employer which is Rs 550.50 will increase to Rs 770.70 post the proposed EPFO wage ceiling revision.

How will wage ceiling revision increase the retirement corpus from EPFO?

Assume that a worker, at the age of 23, enrolls in the EPFO plan, with a basic pay of Rs. 15,000, and continues to contribute for the next 35 years, until he retires at age 58. Throughout his employment, the employee amasses a total corpus of Rs 71.55 lakh, generating an interest sum of Rs 60.84 lakh on his own contribution of Rs 10.71 lakh at an annual interest rate of 8.25%.

Increased wages to Rs 21,000 would result in a corpus of Rs 1 crore over 35 years, with interest of Rs 85 lakh on the Rs 15 lakh personal investment.

As a result, the employee will receive Rs. 28.45 lakh in extra EPF corpus upon retirement, besides getting a higher pension under EPS.

Revision of wage cap to increase the amount of pension

A larger pension amount will be received by EPF subscribers upon retirement since the EPS contribution is adjusted in tandem with increases to the pay ceiling under the EPFO. The following formula is used to determine the EPS pension according to the Employees’ Pension (Amendment) Scheme, 2014:

 

(Number of years of pensionable service X Average monthly salary for 60 months)/70.

The time frame within which an employee made active contributions to their EPF and EPS accounts is known as their pensionable service period.

EPFO hikes withdrawal limit to Rs 1 lakh from Rs 50,000

Additionally, the Employees’ Provident Fund Organisation has raised the withdrawal cap from the existing 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 earlier this month.

Provident funds provide retirement income to over 10 million organized sector employees in India, often serving as a key lifetime savings corpus. The Employees’ Provident Fund Organisation (EPFO), a statutory body under the Ministry of Labour and Employment, manages these schemes.