EPF Coverage May Expand As Department Of Expenditure Approves Rs 25,000 Wage Ceiling: Will It Reduce Your Take-Home Salary?

The Department of Expenditure has approved raising the mandatory wage ceiling for Employees’ Provident Fund (EPF) deduction to Rs 25,000 per month. However, the implementation date will be decided only after the approval by the Union Cabinet. If this happens, this revision will be the first revision to the wage threshold since September 2014, when it was raised from Rs 6,500 to Rs 15,000 per month.  

While the change in wage ceiling is to broaden the social security safety net for private sector employees, it carries immediate financial implications for both employees and employers. For new workers, mandatory enrollment means a higher portion of their basic pay will not be directed towards retirement savings, which can impact their monthly take-home earnings.

For employers, the higher wage ceiling would mean rising payroll and compliance costs as they must now contribute 8.33 per cent of basic pay toward the pension fund for a larger number of employees.

At the same time, the government’s own commitment will also increase to support its 1.16 per cent pension contribution to the EPS pool fund. According to a report in Moneycontrol, implementation of this higher wage ceiling is expected by April 1, 2027 so that the businesses get time to adjust their payroll systems in the meantime.

While the higher wage ceiling will bring more employees mandatorily under the EPFO umbrella for social security savings, would it also mean a reduced take-home salary for employees?

CA Anurag Jain, partner, ByTheBook Consulting LLP, Gurgaon, said that the proposed revision is not yet law. The Finance Ministry has cleared the proposal, and it is awaiting approval from the Union Cabinet, followed by a notification under Section 2(89) of the Code on Social Security, 2020. Until then, Rs 15,000 remains the operative ceiling.

Will A Higher Wage Ceiling For EPF Deduction Mean Reduced Take-Home Salary For Employees?

According to Jain, “this will have an impact for a defined segment”.

This will not reduce their salary but the in-hand salary, as a higher amount will be eligible for EPF-related deduction. “This is a transfer from present income into protected retirement savings rather than a loss,” he added.

He also shared an example to clarify the impact of the hike.

Illustration for reference:

So, the higher deduction towards retirement savings will reduce the current income in hand, especially for those whose basic salary was between Rs 15,000 and Rs 25,000, but their EPF was deducted only on the existing wage ceiling, Rs 15,000.

Will Higher Contribution Increase EPS Pension Amount?

Jain says, “The formula for calculating pension will remain unchanged, which is: Monthly members’ pension = Pensionable wages (averaged over last 60 months immediately preceding the date of exit - subject to max. ‘wage’ ceiling) X Pensionable services / 70. 

So, assuming a pensionable service period of 35 years at a wage ceiling of Rs 15,000, the monthly pension will come out to be Rs 7,500. With the new wage ceiling of Rs 25,000, the same would be Rs 12,500, meaning a Rs 5,000 increase.”

But the pension hike may differ for employees based on their service period.

Jain adds: “It is pertinent to note that in case of revision of wage ceiling, the pensionable salary is computed segment-wise for each period of service. Therefore, in case of members close to superannuation, the expected impact will be nominal. The benefit is expected for members with long residual services. The existing pensioners will gain nothing on account of such revision in wage ceiling.”

To sum up, the higher the wage ceiling for EPFO scheme-related deductions, the higher will be the accumulated fund in retirement corpus.