Proposal To Enhance Statutory Wage Ceiling Under the EPF & MP Act, 1952 and its Impact on stake holders
Summary: The Central Government’s proposal to enhance the wage ceiling under the Employees’ Provident Fund and Miscellaneous Provisions Act (EPF Act) aims to extend social security benefits to more employees by increasing coverage for Provident Fund (PF) and Pension schemes. The current wage ceiling of Rs. 15,000 is set to rise, which will bring more employees into the EPF fold. The key impact of this proposal on stakeholders, particularly employers and employees, varies based on salary levels. Employees earning between Rs. 15,000 and Rs. 21,000 will benefit as they will now be eligible for the Pension Scheme, a benefit previously unavailable to them. However, this extension will impose additional financial obligations on employers, who will need to contribute more to the PF and Pension funds. For employers, the wage ceiling revision results in an increased financial burden, as more employees will fall under the mandatory contribution category. In certain cases, employees’ net take-home salaries may also reduce due to the diversion of a portion of their salary into the Pension Scheme. However, the long-term benefit will be a higher pension and greater provident fund accumulation for these employees at the time of retirement. For employees earning above Rs. 21,000, the revision won’t have an immediate impact, but those previously excluded from pension benefits will now see increased pension payouts as a result of the higher wage ceiling. Overall, the proposal aims to enhance retirement security but introduces additional costs for employers and a slight reduction in the immediate take-home salary for employees, while boosting future retirement benefits.
Introduction
The Central Government is contemplating to enhance wage ceiling under the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952. (in short “EPF Act”), which is a long-standing demand of the employee’s associations. The objective of the proposed change is to increase the social security coverage, by bringing more employees under the ambit of the EPF Act, and to provide better retiral benefits in the form of provident fund and higher pension. In this article I will be examining how the proposed change will impact the employers and employees. Same will be explained with the help of illustrations.
The objective of the EPF Act is to provide retiral benefits like, Provident Fund, Pension to the employee, after superannuation or Family pension to the dependents of the deceased employee and assurance benefit to the dependents, in case of death of an employee. Three schemes are framed under the EPF Act, viz.
1. The Employees’ Provident Fund Scheme, 1952 (“EPF Scheme”)
2. The Employees’ Pension Scheme, 1995 (“Pension Scheme”)
3. The Employees’ Deposit Linked Insurance Scheme, 1976 (“EDLI Scheme”)
Rate Of Contribution
The EPF Act mandates the employer to contribute 12% of aggregate of basic wage, dearness allowance and retaining allowance, if any payable, and employee’s contribution shall be equal to the contribution payable by the employer.
Provident Fund Account and Pension Account
Before examining the financial impact of the proposed enhancement of wage ceiling, it is apposite to discuss the distribution of contributions payable by the employer and employee between two accounts named, Provident Fund Account and Pension Fund Account.
The contributions payable by the employer and employee to the EPFO will be apportioned between Provident Fund Account and Pension Fund Account. Employee’s contribution of 12% will be credited to ‘Provident Fund Account’, out of the 12% contribution payable by the employer, 8.33% of wages (basic wage, dearness allowance and retaining allowance, if any) will be credited to the ‘Pension Account’, balance, 3.67% will be credited to ‘Provident Fund Account. Thus, 15.67% of wages (employee’s 12% plus employer’s 3.67%) will be credited to ‘Provident Fund Account’.
In addition, employer is required to contribute 0.50% of the wages as administrative charges and 0.50% towards the EDLI Scheme.
Existing Wage Ceiling
Central Government by Gazette Notifications number/s G.S.R. 608 ( E), G.S.R. 609 ( E) and G.S.R. 610 ( E) dt. August 22, 2014 enhanced the wage ceiling to Rs 15,000 from Rs. 6500 for the purpose of EPF Scheme, Pension Scheme and EDLI Scheme respectively.
Impact of the proposed enhancement in wage ceiling
The impact on the employer and employee will be studied with the help of illustrations as under.
- No Impact
In certain cases, there will not be any impact on the employer and on take home salary of the employees.
Scenario A: Where employee drawing basic salary more than Rs. 21000:
For example, if an employee joined prior to September 1, 2014[1] and exercised a joint option, under para 11(3) of pre-amended Pension Scheme or u/p 11(4) of amended Pension Scheme of 2014, along with the employer to contribute on actual basic wages to avail higher pension by virtue of the Supreme Court decision in EPFO V. Sunil Kumar & Ors. Etc[2]. and drawing basic salary of Rs 40,000. In this case the impact will be as follows.
Assume employee rendered a continuous service of 21 years, and by virtue of para 10(2) of the Pension Scheme his pensionable service will get increased by 2 years, i.e to 23 years.
| Rate | Impact, under existing wages ceiling of Rs. 15000 | Impact, post enhancement of wage ceiling to Rs. 21000 |
| PF Employee @ 12% —(A) | Rs. 4800 (12%*40000) | Rs. 4800 (12%*40000) |
| PF Employer @ 3.67% –(B) | Rs. 1468 (A)-(C) | Rs. 1468 (A)-(C) |
| Pension Employer @ 8.33% —(C) | Rs. 3332 (8.33%*40000) | Rs. 3332 (8.33%*40000) |
| Pension = (Pensionable Salary) X (Pensionable Service)/ 70 | = (40000) X (23)/70 = Rs. 13143 per month | = (40000) X (23)/70 = Rs. 13143 per month |
Impact
In case of an employee whose basic is more than Rs. 21,000 and contributing on actual basic salary (after exercising joint option for higher pension), the proposed enhancement of wage ceiling does not impact both employer and employee.
Scenario B: Where employee drawing basic salary more than Rs. 21000, however, joined post September 1, 2014.:
For example, if an employee joined after September 1, 2014, by virtue of para 6(a) of the Pension Scheme, he is not entitled to membership under Pension Scheme as his basic salary exceeds statutory threshold of Rs. 15,000.
| Rate | Impact, under existing wages ceiling of Rs. 15000 | Impact, post enhancement of wage ceiling to Rs. 21000 |
| PF Employee @ 12% —(A) | Rs. 4800 (12%*40000) | Rs. 4800 (12%*40000) |
| PF Employer –(B) | Rs. 4800 (A)-(C) | Rs. 4800 (A)-(C) |
| Pension Employer @ 8.33% —(C) | 0 | 0 |
| Pension = (Pensionable Salary) X (Pensionable Service)/ 70 | 0 | 0 |
Impact
Neither employer nor employee got affected by change in wage ceiling. Hence, the class of employees who are drawing basic salary above Rs. 21000 and joined subsequent to the notification of Employees’ Pension Amendment Scheme, 2014 (i.e. joined after September 1, 2014) will not be impacted by the proposed enhancement.
- Subscription under the EPF Scheme and Pension Scheme will be increased
Employer is required to bring more number of employees under the ambit of EPF Scheme in certain cases. As per the existing wage ceiling, employees drawing basic salary up to Rs. 15000 are mandatorily covered under the EPF Act. Enhanced wage ceiling mandates the employer to extend the provident fund and pension benefit to more number of employees, thus, it affects finances of the employer. Employees drawing basic salary between Rs. 15001 to Rs. 21000 will get benefited by proposed change. Same is explained in Scenario C.
Scenario C: Where employee drawing basic salary less than Rs. 21000 but more than Rs. 15,000:
For example, an employee’s basic is Rs. 20,000 joined after September 1, 2014, and employer is contributing on actual basic salary. In this case, employee is not entitled to become member of Pension Scheme by virtue of para 6 (a) of the Pension Scheme. Once the wage threshold increased to Rs. 21,000 from Rs. 15000, employees who are not members of the Pension Scheme previously are entitled to membership and are eligible to pension after superannuation.
Assume employee rendered a continuous service of 21 years, by virtue of para 10(2) of the Pension Scheme his pensionable service will get increased by 2 years, i.e to 23 years.
| Rate | Impact, under existing wages ceiling of Rs. 15000 | Impact, post enhancement of wage ceiling to Rs. 21000 |
| PF Employee @ 12% —A | Rs. 2400 (12%*20,000) | Rs. 2400 (12%*20,000) |
| PF Employer @ 3.67% –B | Rs. 2400 (A-C) | Rs. 734 (A-C) |
| Pension Employer @ 8.33% —C | 0 | Rs. 1666 (8.33%*20000) |
| Pension = (Pensionable Salary) X (Pensionable Service)/ 70 | 0 | = (20000) X (23)/70 = Rs. 6571 per month |
Impact
1. Post enhancement of wage ceiling, Pension Scheme benefits are extended to the employees, who are drawing basic salary between Rs, 15001 to Rs 21000.
2. There is an additional financial burden on employer as more employees fall under the ambit of the EPF Act. Due to increase in the subscription rate, employer is bound to pay employer’s contribution, administrative charges and EDLI charges in respect of newly covered employees.
3. Net take home of the existing employees, who are members of the EPF Scheme and Pension Scheme, will not get affected. However, there is an additional subscription under the Pension Scheme.
4. In case of existing employees who are not covered under Pension Scheme, once they entitled to membership of Pension Scheme post wage revision, 8.33% of the basic wage will get diverted to Pension Scheme. It results in reduction in the provident fund accumulations.
- Higher Pension and Increase in provident accumulations at the time of superannuation
In certain instances, there will be a financial burden on the employer due to proposed enhancement of wage ceiling. Employer bound to contribute more in respect of each employee, who already covered under the Act. Employees net take home will also get reduced. However, employees will see increase in their retiral benefits.
Scenario D: Where employee drawing basic salary more than Rs. 21000, however, contributions are restricted to statutory threshold of Rs. 15,000.
For example, an employee’s basic is Rs. 30,000 and rendered a continuous service of 21 years, by virtue of para 10(2) of the Pension Scheme his pensionable service will get increased by 2 years, i.e to 23 years. Though, the basic salary is Rs. 30,000 employer is discharging the liability on statutory threshold of Rs. 15,000.
| Rate | Impact, under existing wages ceiling of Rs. 15000 | Impact, post enhancement of wage ceiling to Rs. 21000 |
| PF Employee @ 12% —A | Rs. 1800 (12%*15,000) | Rs. 2520 (12%*21,000) |
| PF Employer @ 3.67% –B | Rs. 550 (A-C) | Rs. 770 (A-C) |
| Pension Employer @ 8.33% —C | Rs. 1250 (8.33%*15000) | Rs. 1750 (8.33%*21000) |
| Pension = (Pensionable Salary) X (Pensionable Service)/ 70 | =(15000) X (23)/70= Rs. 4929 per month | =(21000) X (23)/70=Rs. 6900 per month |
Impact
1. Employer is required to pay an additional amount of Rs. 720 (Rs. 2520- Rs. 1800) post wage enhancement and net take home of the employee get reduced by Rs. 720.
2. Pension under the new regime will get increased by an amount of Rs. 1971 (Rs. 6900 – Rs.4929).
3. More money will be deposited in provident fund account of the employee resulting in increment in retirement benefit.
Conclusion
The proposed revision in wage ceiling will result in the following.
1. Increase in membership of Employees Provident Fund Scheme and Pension Scheme.
2. Employer’ contributions in respect of each employee will get increased in certain cases, results in financial burden. In addition, there is a marginal increase in PF administrative charges and EDLI charges.
3. Net take home salary of the employee will get reduced.
4. There will be hike in pension in respect of certain class of employees.
5. Provident fund corpus will get increased.
[1] By GO No. G.S.R. 609 (E ) dt. August 22, 2014 Central Govt. amended Pension Scheme.
[2] SPL (c ) Nos. 8658-8659 of 2019
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