The central government is said to be planning to increase the wage ceiling limit under the Employees' Provident Fund (EPF) scheme to Rs 21,000 from the existing limit of Rs 15,000. The previous time the central government enhanced the wage threshold was eight years ago in September 2014.
According to ET,?if this proposal?goes through, it would impact the amount of contribution made towards the EPF scheme and the Employees' Pension Scheme (EPS). It has a bearing on the amount of pension an employee is entitled to at the time of retirement.
Currently, contributions towards the Employees' Pension Scheme (EPS) account are calculated by capping the basic salary at Rs 15,000 a month. So the maximum contribution to an EPS account is currently restricted to Rs 1,250 a month. So, if the government hikes the wage ceiling to Rs 21,000, this contribution will be increased. "The monthly EPS contribution will become Rs 1,749 (8.33% of Rs 21,000)," says Mallika Noorani, Senior Partner, Parinam Law & Associates, as per the report.
According to the Employees' Provident Fund and Miscellaneous Provisions Act, 1952, both an employee and employer make matching contributions of 12% each of basic salary, dearness allowance and retaining allowance, if any, to the EPF account. The employee's entire contribution is deposited in the EPF account.?
On the other hand, out of the employer's contribution of 12%, 8.33% is deposited in the Employees' Pension Scheme and the balance 3.67% is deposited in the Employees' Pension Scheme and the balance 3.67% is deposited in the EPF account.
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An increase in the wage ceiling under the EPF scheme will also lead to a higher pension amount at the time of retirement. According to the Employees Pension (Amendment) Scheme, 2014, the formula to calculate the EPS pension is as follows:
(Number of years of pensionable service X Average monthly salary for 60 months)/70.
If the wage ceiling limit threshold is enhanced to Rs 21,000, then the amount of pension received will be increased. As per ET, Noorul Hassan, Partner, Lakshmikumaran Sridharan Attorneys, explains this with an example.
Suppose an employee's pensionable service period is 32 years. The monthly salary will be calculated by taking the average pay of the 60 months before retirement. However, if the basic salary of the employee during the 60 months is higher than Rs 15,000 per month, then Rs 15,000 will be considered as the salary for a month to make the calculation for pension. Further, if an employee has worked more than 20 years, then 2 years are added as bonus to the service period. The monthly pension an EPS member is eligible to receive will be Rs 7286, i.e., (34x15,000)/70.
However, if the wage threshold is enhanced, the average monthly salary will become Rs 21,000 for the purpose of calculation. The monthly pension an employee is eligible to receive in such a case will be Rs 10,200, i.e., (34x21,000)/70. So, an increase of Rs 6,000 in the wage threshold takes the monthly pension up by Rs 2,900 approximately, the report mentioned.
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As per the EPF laws, if an employee's monthly basic salary exceeds Rs 15,000, they cannot join EPS even if they are part of the EPF scheme. However, if the wage threshold is hiked to Rs 21,000, then employees who join the EPF scheme with a basic salary exceeding Rs 15,000 will be eligible to join EPS.
According to ET, "An individual whose basic salary is higher than Rs 15,000 but less than Rs 21,000 will mandatorily become an EPS member if the proposal goes through. These employees will become eligible for pension at retirement age. However, employees should note that if they become an EPS member, then the employer's contribution to the EPF account will become lower. This is because currently, both employees' and employers' contributions go into the EPF account. This leads to a higher EPF corpus. However, once these employees become members of the EPS scheme, then 8.33% of the employer's 12% will go into the EPS account. This may lead to lower EPF corpus for employees," Noorani says.
Enhancement in the EPS contribution from the existing level of Rs 1,250 per month to the proposed Rs 1,749 may lead to a lower EPF corpus for existing employees. Wondering why??
This is because an employer can currently deposit a maximum of Rs 1,250 to the EPS account. Any balance is deposited into the EPF account. If the deposit into EPS is hiked, the balance deposit into the EPF account will become lower.
As per the ET report, Hassan says, "Suppose an employee's current basic salary is Rs 30,000 per month. The employer contributes 12% of Rs 30,000 to the EPF account - Rs 3,600 per month. Out of this 12%, 8.33% goes to the EPS account, the pension account. For EPS contribution, the wage threshold is Rs 15,000. Hence, the EPS pension contribution is restricted to Rs 1,250. The balance amount of Rs 2,350 (Rs 3,600 minus Rs 1,250) goes into the EPF account. If the wage threshold is enhanced to Rs 21,000 per month, the EPS pension contribution becomes Rs 1,749 per month. The balance amount of Rs 1,851 (Rs 3,600 minus Rs 1,749) will be deposited in the EPF account.
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