Budget 2021: Labour Ministry Recommends Reduced EPF Contribution - Exclusive

The ministry has proposed decreasing the rate of contribution made by both employers and employees from 12% to 10% each of the latter’s monthly wage, as one of its proposals to the ministry of finance for the Union Budget 2021-22, a top government official said, requesting anonymity.

The ministry has also suggested a simultaneous increase in the threshold for covering formal sector workers under the EPFO schemes -- from those earning a monthly wage of up to Rs 15,000 to Rs 21,000, the official said.

The proposal to decrease the rate of contribution towards EPFO schemes will lead to a higher take-home salary for workers and a decrease in the wage bill for employers, giving liquidity to workers in the formal sector. The move to increase the wage ceiling for coverage of the EPFO schemes will bring more formal sector workers under its fold.

The increased wage ceiling is pertinent as the minimum wage for the private sector and government employees have gone up over the past few years and due to inflation, the official cited above said.

The labour ministry official said there are around 9.1 million EPF subscribers whose monthly wage was in the range of Rs 15,000-Rs 21,000. This constitutes close to one-fifth of the EPFO’s active subscriber base of around 50 million. The wage ceiling for EPFO coverage was last revised in August 2014 from Rs 6,500 to Rs 15,000.

An e-mail sent to the labour and finance ministry spokespersons didn’t elicit any response.

“For low-income group, a contribution of 12% towards EPF reduces their take-home salary and the move will lead to more income in their hands. However, on the flip side, the EPF investment leads to automatic tax savings as lower-income bracket workers tend to invest less. Increasing the wage ceiling will increase coverage of workers under the EPFO’s fold,” Deepesh Raghaw, a registered investment adviser at personalfinanceplan.in said.

The law mandates EPF coverage for all establishments employing at least 20 workers. Though it is mandatory only for employees earning up to Rs 15,000 a month, many employers voluntarily cover employees with a higher wage. The EPFO runs three schemes for formal sector workers: the Employees’ Provident Fund scheme, the Employees’ Pension Scheme (EPS), and the Employees’ Deposit Linked Insurance Scheme.

The government had temporarily reduced the rate of contribution from 12% to 10% of both employer’s and employee’s share each from May-July, 2020 as a part of the Atmanirbhar Bharat stimulus package to offer relief from the economic impact of the Covid-19 pandemic. It had estimated that the move would provide liquidity to the tune of Rs 2,250 crore a month for both employers and employees.

However, the move to increase wage ceiling for EPFO coverage to Rs 21,000 a month will lead to a higher financial burden for the central government which contributes 1.16% of the wages to pension account for workers with wages up to Rs 15,000. This may lead to additional spending to the tune of over Rs 1,600 crore for the central government as more workers will get covered under EPFO, according to a document prepared by the EPFO in March 2017. Back then, the EPFO had mooted increasing the wage ceiling from Rs 15,000 to Rs 25,000 a month.