Wage ceiling limit: Will you benefit or lose by increasing the wage ceiling limit in PF? Know the complete calculation

New Delhi: There is good news for crores of Employees’ Provident Fund (EPF) subscribers. The central government may soon increase the salary ceiling under the EPF scheme from the current Rs 15,000 to Rs 21,000.

The government had last increased the wage ceiling from Rs 6,500 to Rs 15,000 in September 2014. The increase in the salary ceiling will affect the contribution made by employees to EPF and Employee Pension Scheme (EPS). This will bring more employees under the EPS pension scheme. Here we are going to tell you how the increase in EPF salary limit will affect you.

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According to the Provident Fund Act, if an employee’s basic salary is more than Rs 15,000 per month, he cannot join EPS, even if he is a part of the EPF scheme. Now, if the salary limit is increased to Rs 21,000, employees joining the EPF scheme with a basic salary of more than Rs 15,000 will also be eligible to join EPS. Once the proposal is approved, individuals with a basic monthly salary of Rs 21,000 will be able to enrol in the EPS scheme. This change will also pave the way for these employees to become eligible for pension on retirement.

EPF is less, EPS is more

However, employees should note that if they become EPS members, the employer’s contribution to the EPF account will reduce. This is because currently both employee and employer contributions are credited into the EPF account. This makes the EPF corpus larger. Once these employees join the EPS scheme, 8.33% of the employer’s 12% contribution will go into the EPS account.

The increase in EPF wage ceiling will also increase the EPS contribution. Currently, a contribution of Rs 1,250 is deposited in the employee’s EPS account every month. The current EPS law allows a person to deposit a maximum of Rs 1,250 in an EPS account. EPS contribution is calculated on the employer’s contribution over the wage ceiling limit. That is, it is 8.33% of Rs 15,000. The balance of the employer’s contribution is deposited in the employee’s EPF account along with his own contribution.

What will be the effect

Now if the salary limit is increased to Rs 21,000 per month, Rs 1,749 will be deposited in the EPS account per month. Due to the increase in EPS pension contribution, less balance will be deposited in the employee’s EPF account. This can be understood with an example. Suppose the basic salary of an employee is Rs 25,000 per month. His employer contributes 12% of Rs 25,000 to the EPF account which comes to Rs 3,000.

Out of this 12%, 8.33% goes to the EPS account. The salary limit for EPS contribution is Rs 15,000. Hence the EPS pension contribution is limited to Rs 1,250. The balance of Rs 1,750 (Rs 3,000 minus Rs 1,250) goes to the EPF account. If the salary limit is increased to Rs 21,000 per month, the EPS pension contribution becomes Rs 1,749 per month. The remaining Rs 1,251 (Rs 3,000 minus Rs 1,749) will be deposited in the EPF account.

How much will be the benefit

The increase in EPF salary ceiling will also result in higher pension amount on retirement. The formula to calculate EPS pension on retirement uses salary ceiling as the maximum average monthly salary. If the salary ceiling limit is increased to Rs 21,000, the pension amount received will also increase. The formula to calculate EPS pension is as follows: Number of years of pensionable service x Average monthly salary for 60 months)/70.

Let us understand this with an example. Suppose the pensionable service period of an employee is 30 years. The monthly salary will be calculated by taking the average salary of 60 months before retirement. However, if the basic salary of the employee during the 60 months is more than the current salary limit of Rs 15,000 per month, then Rs 15,000 will be considered as one month’s salary to calculate the pension. Apart from this, if an employee has worked for more than 20 years, then 2 years are added to the service period as a bonus. In this way, the monthly pension received by the EPS member will be Rs 6,857, i.e. (32×15,000)/70.

How much will the pension increase

However, if the salary limit is increased, the average monthly salary for calculation purposes will become Rs 21,000. In such a case, the monthly pension received by the employee will be Rs 9,600. The calculation for this will be based on (32×21,000)/70. Thus, an increase of Rs 6,000 in the salary limit will increase the monthly pension by Rs 2,743. Both the employee and the employer contribute 12% of the basic salary to the EPF account. The entire share of the employee goes to the EPF account. Out of the employer’s 12% contribution, 8.33% is deposited in the EPS account and the remaining 3.67% in the EPF account.

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