EPFO ceiling hike to raise employer cost by ₹1,200 per worker

Higher EPF wage ceiling could raise employer costs by up to ₹1,200 per employee while reducing take-home pay for workers in the affected wage band

The increase in the statutory wage ceiling for mandatory Employees’ Provident Fund (EPF) contributions from ₹15,000 to ₹25,000 will raise employers’ monthly social security outgo by up to ₹1,200 per employee in the affected wage band as well as in the case of those earning more but have contributions capped at the statutory ceiling, according to industry experts.

 

Higher employee contributions will obviously reduce immediate take-home pay as their mandatory contribution rises.

 

For an employee earning ₹25,000 or more, where contributions are currently restricted to the statutory ceiling, the employer’s statutory EPF and Employees’ Pension Scheme (EPS) contribution will rise from ₹1,800 to ₹3,000 per month, experts said.

 

There are employees whose PF contribution is calculated on their actual basic wages rather than being capped at the statutory wage ceiling. Under Para 26(6) of the EPF Scheme, employees can contribute on wages above the statutory ceiling with the employer’s contribution also being made on the higher wages, subject to riders. In those cases, there will not be an increase in employer contribution just because of the statutory limit change.

 

Balasubramanian A, senior vice president, TeamLease Services  said the ₹15,000-25,000 wage band covers a significant share of entry-and mid-level roles, with private-sector average salaries close to ₹23,000. As a result, manufacturing, retail, logistics and other high-volume, labour-intensive sectors are likely to see a sharper increase in coverage. 

 

The maximum Employees’ Deposit Linked Insurance (EDLI) contribution will also increase from ₹75 to ₹125 per employee per month, said Puneet Gupta, partner, People Advisory Services-Tax, EY India.

 

“For employers contributing only up to the statutory ceiling, the revision from ₹15,000 to ₹25,000 will increase their social security outgo on account of higher EPF, EPS and EDLI contributions, as well as applicable administrative and inspection charges. The employer’s statutory EPF and EPS contribution obligation will increase from ₹1,800 per month to ₹3,000 per month, representing an additional cost of ₹1,200 for the employee per month,” Gupta said. 

 

Under the existing rules, employers that restrict provident fund contributions to the statutory wage ceiling calculate the mandatory contribution on a maximum wage of ₹15,000 a month, even if an employee earns more. Raising the ceiling to ₹25,000 will increase the wage base on which EPF and related social security contributions are calculated. For an employee earning ₹25,000 or more, this would raise the employer's EPF and Employees’ Pension Scheme (EPS) contribution from ₹1,800 to ₹3,000 a month. 

 

The higher ceiling will also affect employees’ monthly cash flows. For workers in the ₹15,000-25,000 wage band, the mandatory employee contribution could rise from ₹1,800 to ₹3,000 a month once the change is implemented through a gazette notification, resulting in around ₹1,200 lower take-home pay, said Amrita Tonk, partner at CMS IndusLaw.

 

Vibhore Goyal, founder of OneBanc, a fintech platform focused on payroll and employee financial services, said employees could end up bearing the cost of both their own and their employer’s higher contributions if companies continue to include the employer contribution in cost-to-company (CTC).

 

He estimated that for around four crore employees currently contributing only up to the statutory ceiling, this could mean ₹2,400 less in take-home pay each month, or ₹28,800 a year. Across this group, that would amount to about ₹1 lakh crore in lower take-home pay, he said.

 

Of this, the 51 lakh additional employees expected to come under EPFO coverage would account for about ₹14,700 crore. 

 

The increase in the EPFO wage ceiling had been under discussion for several years, with the proposal facing delays amid concerns from industry over the higher costs of implementing the labour codes, according to two people directly aware of the matter.

 

The government had held off on the move as companies were already adjusting to higher statutory and compliance costs under the new labour regime, they said. 

 

The issue gained fresh momentum after the Supreme Court in January directed the Centre and the Employees’ Provident Fund Organisation (EPFO) to take a decision on revising the ₹15,000 ceiling within four months. The ceiling had also increasingly fallen out of step with minimum wages, with statutory minimum wages in several states and categories exceeding ₹15,000. Delhi, for instance, has notified minimum wages above ₹18,000 a month for unskilled workers, with higher rates for semi-skilled and skilled workers.

 

The higher payroll cost is unlikely to translate immediately into lower hiring, with companies instead expected to examine how compensation is structured. Balasubramanian A, senior vice president, TeamLease Services, said employers could rebalance cost-to-company (CTC) structures between basic pay and allowances to absorb the additional contribution.

 

“We don't expect this to affect hiring volumes. The more likely response is employers rebalancing CTC structures between basic pay and allowances to absorb the cost,” he said.

 

Vibhore Goyal, founder of OneBanc, said employers effectively recover their contribution through CTC, meaning employees could bear the impact through lower present-day take-home pay unless companies restructure compensation.

 

“Employers recover their 12 per cent through CTC, as they always have, so the employee carries both sides,” Goyal said.

 

Companies with a large share of employees in the ₹15,000-25,000 wage band and those that currently cap provident fund contributions at the statutory ceiling are likely to face a bigger increase in payroll and social security costs, Gupta said. 

 

The government has estimated that the higher ceiling will bring more than 51 lakh additional employees under mandatory EPFO coverage, giving further impetus to formalisation of employment.

 

“By sector, the labour intensive and high employee headcount industries like manufacturing, retail, IT/ITES will see the largest increases in newly covered headcount, since most of their employees would fall in the INR 15000 to 25000 band,” Tonk of CMS IndusLaw said.