Govt hikes wage ceiling for EPF coverage: We calculate how this could impact your pension payout at retirement

The Union Cabinet on Wednesday has after 12 years, approved raising the wage ceiling eligibility for Employees Provident Fund (EPF) coverage by ₹ 10,000, from the ₹ 15,000 set in 2014, according to a statement from Union Information and Broadcasting (I&B) Minister Ashwini Vaishnaw.

According to an official government release, the ceiling has been hiked in order to “reflect sustained wage growth , rising incomes and continued expansion of formal employment over the intervening years”.

Wage ceiling for membership to the EPF Organisation has been raised to ₹ 25,000 per month, bringing an additional 51 lakh employees under mandatory provident fund cover, and widening social security coverage for workers. Notably, the EPFO also administers pension under the Employees’ Pension Scheme (EPS) and insurance protection under the Employees’ Deposit Linked Insurance Scheme ( EDLI ).

Latest EPFO data shows around 7.98 crore contributing members across about 7.68 lakh contributing establishments, while the EPS provides pension benefits to around 82 lakh pensioners.

Today, we calculate how this decision can impact your pension and how much increase in payout you could expect:

The EPFO's pension benefit is provided to all subscribers who have an account with for more than 10 years. Under this, 8.33% of the 12% employer contribution to your EPF account is directed towards your EPS account. Further, the government also contributes 1.16% (subject to wage ceiling ) towards the fund.

Thus, with both the employer and government contribution subject to wage ceiling, the total accumulated corpus towards your final pension payout will increase.

At time of retirement, members can withdraw their provident fund amount in full and choose to maintain EPS annuity by availing a Scheme Certificate. As per the rules, 58 years is considered age of retirement, and members can choose to delay pension payments till 60 years of age, by either:

Pension is disbursed monthly to eligible members or beneficiaries (through banks / post offices). This includes superannuation pension, early pension, family pension, orphan / widow pension, and disablement pension. Notably, disbursement ensured even if employer defaults, as EPFO guarantees benefit once membership conditions are met.

Notably, pension is calculated using the average of the past five years' salary (subject to wage ceiling). This means that in order to fully reap benefit of the higher bracket, you must have at least five years of service with the increased wage ceiling.

Formula is as follows: Pension = (Pensionable Salary (average of last 60 months) x Pensionable Service) / 70.

Here's a look at the pension calculation for every five years of increments:

Under previous wage ceiling, payout would be: (15,000 x 10) / 70 = 2,143

Under previous wage ceiling, payout would be: (15,000 x 15) / 70 = 3,215