New EPF wage ceiling: What changes for your PF, pension and insurance

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The Centre has raised the wage ceiling for mandatory Employees’ Provident Fund Organisation (EPFO) coverage from ₹ 15,000 to ₹ 25,000 a month, according to a gazette notification issued on Thursday.

The revised ceiling, effective from 17 September, will bring more employees under mandatory provident fund coverage. It was last revised in 2014 from ₹ 6,500 to ₹ 15,000.

The change will affect not just provident fund contributions, but also pension eligibility and Employees’ Deposit Linked Insurance (EDLI) benefits.

Employees' Provident Fund ( EPF ) membership is mandatory for employees whose PF wages, as defined under the Code on Social Security, are up to the notified wage ceiling. Those having wages above the ceiling can also opt to contribute to the EPF by submitting a joint declaration form with their employer. They can contribute either 12% of the wage ceiling or 12% of their actual PF wages (basic salary, dearness or any other retaining allowances), subject to the employer’s internal policy.

“The announcement is most relevant for two categories of employees: Those drawing ‘wages’ between ₹ 15,000 and ₹ 25,000 for whom the EPFO enrolment is presently optional and will now be made mandatory, and existing members whose contributions are currently restricted to the ₹ 15,000 ceiling,” said Anurag Jain, co-founder and partner, tax and regulatory consultancy firm ByTheBook Consulting Llp.

“Employees drawing ‘wages’ above ₹ 25,000 at the time of joining will remain ‘excluded employees’, unless already an existing PF member,” added Jain. This means a fresher with monthly wages above ₹ 25,000 can choose to remain outside the EPFO coverage.

If employee contribution to the EPF is restricted to 12% of the wage ceiling, the maximum monthly contribution would rise from ₹ 1,800 (12% of ₹ 15,000) to ₹ 3,000 (12% of ₹ 25,000). This means a maximum reduction of ₹ 1,200 a month, or ₹ 14,400 a year, in take-home pay. The employer contribution too will increase by the same amount.

Ankur Jain, partner and leader, regulatory and business solutions, PwC India, however, said the employer cannot readjust its increased contribution within employees' existing cost-to-company (CTC). “It has to be an additional cost hitting the P&L (profit and loss).”

In other words, while the employee’s take-home pay will fall by ₹ 1,200 per month, the employer will contribute an additional ₹ 1,200 towards the employee’s PF.

For employees already contributing on their full actual wages, take-home pay will not change merely because the ceiling is raised. “If employee and employer contribution is 12% of the common full-basic setup, only the internal EPS/EPF split will move,” said Kunal Kabra, founder, Kustodian.Life.

The impact on the Employees’ Pension Scheme (EPS) contribution is different because the employer’s contribution is split between the EPS and the EPF. The employer contributes 12% of wages to the EPF, of which 8.33% of the applicable wage ceiling is diverted to the EPS.

At the previous ₹ 15,000 ceiling, the monthly EPS contribution is ₹ 1,250.