In a step towards widening India’s social security net and formalising the workforce, the Ministry of Labour and Employment has notified a hike in the wage ceiling for the Employees’ Provident Fund Organisation (EPFO) effective Thursday (September 17). The revision comes after a 12-year-long gap.

The wage ceiling for the retirement fund body now stands at Rs 25,000 from the earlier Rs 15,000. It means that over 8 crore employees who are subscribers to the EPFO will now have to mandatorily contribute to the EPF scheme, the Employees’ Pension Scheme (EPS) and the Employees’ Deposit Linked Insurance (EDLI) Scheme up to the wage limit of Rs 25,000. Beyond this, contributions will be voluntary.

The decision will most impact workers earning between Rs 15,000 and Rs 25,000, as their social security contributions will rise, with the revision expected to bring in over 51 lakh additional workers under the EPFO’s mandatory coverage. However, some experts have also flagged the likelihood of a lower take-home pay for employees, among other concerns.

What changes for employees?

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Existing EPFO subscribers, whose Provident Fund contributions are linked to basic pay or actual pay higher than the previous wage ceiling of Rs 15,000, will see an increase in their pension contribution from Rs 1,250 to Rs 2,083. This has been capped at the wage ceiling for most subscribers (8.33% of Rs 25,000, as against Rs 15,000 earlier).

This is the ninth time that the wage ceiling under the EPF Scheme has been revised, ever since it began in 1952, and only the third such instance where the gap between two wage revisions was longer than a decade. The last wage ceiling revision was in September 2014, when it was raised to Rs 15,000 from Rs 6,500, after it was hiked to Rs 6,500 from Rs 5,000 in June 2001.

Change in wage ceiling for the EPF Scheme over the years

The hike may also signal to the labour market and states about a higher wage scale for workers, experts said. At present, at least seven major states and Union Territories have the statutory minimum wages for unskilled workers above the Rs 15,000 wage ceiling: Delhi (Rs 17,800), Maharashtra (Rs 17,000), Karnataka (Rs 16,800), Haryana (Rs 16,500), Gujarat (Rs 16,000), Rajasthan (Rs 15,500), and Uttarakhand (Rs 15,220).

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What is the significance of the EPFO wage ceiling?

The wage ceiling serves as the base for mandatory coverage of workers in establishments covered under the ambit of the EPFO for all three schemes.

Both employees and employers contribute 12% of the employee’s basic salary, dearness allowance and retaining allowance, if any, to the EPF. The employee’s entire contribution goes to the EPF, while the 12% employer contribution is split as 3.67% to the EPF and 8.33 % to EPS, that is, the Employees’ Pension Scheme. The government contributes 1.16% for an employee’s pension up to the wage ceiling to make up for any shortfall due to lower wages. Employees do not contribute to the pension scheme.

The EDLI Scheme, which provides life insurance cover ranging between Rs 2.5 lakh and Rs 7 lakh to EPF members in case of death during service, requires employers to contribute 0.5% of wages, with no deduction from employees.

What will be the cost for the government and the industry?

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With the expansion, the government will have to bear an additional cost of Rs 1,089 crore. The annual government outgo will then increase to about Rs 11,339 crore against the existing annual budgetary support of about Rs 10,250 crore.

On average, the total EPF contribution for a worker is expected to rise by Rs 600 per month, as per official estimates. The government said the latest revision will “reflect the sustained wage growth, rising incomes and a continued expansion of formal employment over the intervening years”.

Another concern raised by experts is that with the hike in the wage ceiling, employers will try to absorb it in the existing cost-to-company (CTC) structure, effectively reducing take-home pay for workers.

With an increase in contributions, employers may also face higher costs. Puneet Gupta, Partner, People Advisory Services-Tax, EY India, said, “This is expected to enhance retirement savings and social security coverage for employees. However, it will also have a direct cost implication for employers through higher PF, pension and EDLI contributions, particularly for employees currently drawing wages between Rs 15,000 and Rs 25,000 where contributions are restricted to the statutory ceiling. Employees in the affected salary bracket are also likely to witness a reduction in take-home pay due to the higher employee PF contribution.”

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K E Raghunathan, National Chairman, Association of Indian Entrepreneurs (AIE) and a former employers’ representative on the EPFO Board, said there could be some increase in operating costs, particularly for manufacturing and Micro, Small and Medium Enterprises, in the short term. But in the long run, stronger social security for workers is an important investment in India’s workforce, he said.

And what are some of the criticisms?

Trade unions criticised the wage ceiling hike, which has been discussed at several meetings of the EPFO’s Central Board of Trustees (CBT) over the last decade.

“A social-security ceiling frozen at Rs 15,000 for 12 years was already completely out of sync with the prevailing wages. Besides, Rs 25,000 is not an adequate ceiling. Any social security must keep pace with the workers’ earnings. It must evolve in consonance with minimum wages, actual wages, inflation and cost of living. This revision is therefore too little and too late. The All India Trade Union Congress (AITUC) demands that the ceiling may be raised to Rs 30,000 in order to include deserving sections of employees,” Amarjeet Kaur, General Secretary, AITUC, said.