Changes in EPF Scheme could affect you

When the Ministry of Labour and Employment conducted a recent study, it found that a number of employees in sectors such as banks, construction, services and so on did not enjoy any provident fund or pension benefits.

This is because their monthly pay exceeded ₹6,500 a month, pushing them outside the ambit of the Employees Provident Fund Act, 1951. To address this concern, from September 1, 2014, the threshold of monthly pay for employees covered by the EPF has been raised to ₹15,000. Some other changes have also been brought about. We explain the impact through a few examples:

Suresh was earning ₹15,000 as his monthly pay and was not making contributions under the EPF Act.

He was considered an excluded employee because his pay exceeded ₹6,500 a month. However, with effect from September 1, 2014, Suresh as well as his employer will be required to mandatorily make contributions of ₹1,800 a month (12 per cent of his basic pay) under the EPF Act toward his pension and provident fund contributions. Suresh will also be eligible to receive a regular pension after retirement if he has completed 10 years of service. To determine the pensionable salary on or after September 1, 2014, the period for calculating the average monthly pay has been increased from 12 months to 60 months.

Vivek, a colleague, is leaving the firm where Suresh works and is joining a multinational company for ₹30,000 a month, including a monthly basic pay of ₹18,000 from September 1. Vivek was not enrolled as a member of the EPF by his previous employer as he was also treated as an excluded employee under the old law given that his monthly basic pay was ₹15,000 then.

However, in order to build a long-term retirement fund for himself, Vivek now wishes to become a member of the EPF under his new firm. His new employer company offers him two options. Vivek can either make a contribution to the EPF up to the statutory threshold of ₹15,000, or contribute 12 per cent of his entire monthly basic pay of ₹18,000.

As Vivek was not an existing member of the EPFO, he will not be eligible for membership under the pension scheme. Consequently, his entire contribution, as well as that of the employer, will now be allocated to the provident fund scheme. Ramesh, whose monthly pay is ₹20,000, is an existing member under the EPF Act. Ramesh asked Vivek whether he will also not be required to contribute to the Pension Scheme.

Vivek replied that since Ramesh was already an existing member, he will be required to contribute to the Pension Scheme at a rate of 8.33 per cent on ₹15,000.

But he will not be able to contribute toward pension on his higher salary. The above is a significant change as this indicates the Government’s long-term intention to restrict the pension scheme only to members earning below the stipulated threshold.

Tuning into this discussion, David, a director of the company and a US national, wanted to understand if these changes will have any impact on foreign nationals, who are classified as ‘international workers’ under the EPF Act.

Suresh pointed out that a new member (including an international worker) would not be required to contribute to the Pension Scheme if the monthly pay exceeds ₹15,000.

For such an international worker, the entire employer and employee share of contributions (24 per cent of monthly salary) will be allocated to the Provident Fund Scheme. While David understood that he would not be impacted as he was already a member, he was glad that foreign nationals deputed from their overseas group companies would benefit from this change.

The writer is Director – Tax & Regulatory Services, EY

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