EPF Pension: Pension could reach up to ₹12,500 per month; understand the full impact of the government's new decision..
EPF Pension: The Union Cabinet has approved a proposal to raise the wage ceiling for mandatory EPF and EPS coverage. This limit will now increase from ₹15,000 to ₹25,000. According to the government, approximately 51 lakh employees will benefit from this decision.
Until now, mandatory EPF and EPS coverage applied to salaries up to ₹15,000. This limit had remained unchanged since September 1, 2014. With the implementation of the new limit, a larger number of employees will fall within this ambit.
Increase in pension by up to 66.7%
This decision is also expected to have a direct impact on the EPS (Employees' Pension Scheme). This is because the wage ceiling used for calculating the pension could also be raised to ₹25,000.
The pension formula under EPS is as follows:
Pension = Pensionable Salary × Pensionable Service ÷ 70
Currently, the maximum pensionable salary is considered to be ₹15,000. Consequently, an employee with 35 years of pensionable service receives a formula-based pension of approximately ₹7,500.
If this limit is raised to ₹25,000, the pension for 35 years of service could rise to ₹12,500. In other words, based on the formula, the pension could see an increase of 66.7%.
Pensionable Service | Pension at ₹15,000 wage ceiling | Pension at ₹25,000 wage ceiling | Potential Increase
10 years | ₹2,143 | ₹3,571 | 66.70%
20 years | ₹4,286 | ₹7,143 | 66.70%
25 years | ₹5,357 | ₹8,929 | 66.70%
30 years | ₹6,429 | ₹10,714 | 66.70%
35 years | ₹7,500 | ₹12,500 | 66.70%
Latha Iyer, CHRO of Zaggle, said, "If the increased limit is applied to EPS calculations, there could be a significant rise in the pension amount. However, the actual increase will depend on the years of pensionable service and the final rules issued by the government."
Higher EPF deductions are possible
Now, let's look at EPF. The situation here is slightly different. An increase in the wage ceiling does not necessarily mean that EPF deductions from every employee's salary will rise immediately. Currently, some companies base EPF contributions on the ₹15,000 limit, while others contribute based on the employee's actual basic pay. Therefore, the impact of the new system will depend on the employee's existing policy.
Suppose an employee's EPF contribution is currently calculated based on the ₹15,000 limit. At a rate of 12%, ₹1,800 is deducted from the employee's share every month. If the 12% contribution is applied to the new ₹25,000 limit, this amount would rise to ₹3,000. This means an additional ₹1,200 would go into the EPF account each month.
This will directly impact the take-home salary; the salary received in hand could decrease by up to ₹1,200. However, this money will go towards the employee's retirement savings. Not every employee's salary will be affected.
For employees whose EPF contribution is already based on their actual basic pay, the new limit may not have any immediate significant impact.
For instance, if an employee's company is already deducting 12% EPF on a basic pay of ₹25,000 or more, a mere increase in the wage ceiling does not necessarily mean their deduction will change.
Neha Jain, CHRO at Choice International, said, "If EPF contribution becomes mandatory based on the increased limit, an employee currently contributing 12% on the ₹15,000 limit would end up contributing ₹3,000 instead of ₹1,800 per month. This could result in a reduction of up to ₹1,200 in their monthly take-home salary."
She added, "If the contribution remains capped at the current limit, there will be no immediate impact on take-home salary. Therefore, the final notification and the new contribution structure will be crucial."
Disclaimer: This content has been sourced and edited from Money Control. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.
