Monday, October 13, 2014

Amendments to the Provident Fund and Pension Fund Schemes Under the EPF Act


[The following guest post is contributed by Madhusudan Bose, who is a lawyer and company secretary by profession, at PRA Law Offices, New Delhi. Author’s views are personal]

Pursuant to the proposals made by the Finance Minister in his Budget speech, the Ministry of Labour and Employment introduced a number of amendments to the Employees’ Provident Funds Scheme (“EPF Scheme”) and the Employees’ Pension Scheme (“Pension Scheme”) under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (“EPF Act”). These were through notifications dated August 22, 2014. The said amendments have come into effect from September 1, 2014.

Object of the amendments and implications for employers and employees

The amendments were in effect long overdue.  The Ministry of Labour and Employment had last revised monthly income limits for coverage under EPF Scheme in the year 2001.  The extant EPF Scheme mandated employees with monthly pay[1] of upto Rs. 6,500/- to mandatorily become members of the EPF scheme.  This limit has now been revised to Rs. 15,000/-.  Considering the growth rate of wages and salaries in the past 15 years, it is but a matter of time before even the revised limit of Rs. 15,000/- becomes dated.

Furthermore, minimum PF contributions will now have to be based on the revised cap.  Thus, employees whose PF contributions had been limited to 12% of monthly pay of Rs. 6,500/- will now face an increase in PF deduction of upto Rs. 780/- from their salaries.  Similarly, employers would have to set apart additional funds to match the employee contributions in the above cases. 

An unexpected upshot is the exclusion of new EPF members from becoming members of the Pension Scheme, if their monthly pay exceeds Rs. 15,000/-.  This rule applies to international workers also.  The Pension Scheme is not looked upon with favor by high earning employees, as the diversion to the pension fund is quite meagre (being limited to 8.33% of Rs. 6500/- earlier), and the benefit, howsoever minor, accrues upon superannuation, disablement etc only.  However, the above exclusion applies to new members only.

All employees and employers need to acquaint themselves with the new changes brought about by the aforesaid amendments.  For employees, the nitty-gritties are more, as they have to take into account the difference in treatment, not only for international workers and Indian employees, but also existing members, and new persons joining after September 1, 2014.  This is discussed in detail as under.

Summary of important amendments made to the provident fund and pension schemes under the EPF Act

1.    Eligibility limit for membership to EPF scheme increased to Rs. 15,000: Earlier, only employees whose monthly pay was Rs.6,500/- or less were required to become a member of the EPF Scheme. Now, this limit has been increased to Rs. 15,000/-.

It is pertinent to note that the said limit does not apply to ‘international workers’.  ‘International workers” (“IWs”) of countries with whom India has not executed a social security agreement (“SSA”) and working for a covered establishment in India are required to become a member under the EPF scheme irrespective of amount of their monthly pay. 

2.    Increase in cap on employees’ / employers’ contribution:  In line with the above amendment, the maximum contribution by an employee / employer, where monthly pay of the employee exceeds Rs. 15,000/-, has been capped to the amount payable on monthly pay of Rs. 15,000/- (the earlier cap was Rs. 6,500/-).  Of course, the employee / employer can choose not to restrict their contributions to the above limits.

As before, the aforesaid caps do not apply to ‘international workers’ and there is no cap on monthly pay on which contributions are payable by employer / employee in respect of IWs from non-SSA countries.

3.    New employees having monthly pay more than Rs. 15,000/- excluded from Pension Scheme:  On and from September 1, 2014, the Pension Scheme will apply only to those persons who become a member of the EPF Scheme and whose pay on such date is less than or equal to Rs. 15,000/-.

Persons who were members of the Pension Scheme before September 1, 2014 would continue as such members, and contribute 8.33% of their monthly pay to the Employees’ Pension Fund.

Pertinently, the above rule is also applicable to IWs from non-SSA countries who are otherwise required to become members of the EPF Scheme.  In other words, with effect from September 1, 2014, if an IW from a non-SSA country, becomes a member of the EPF scheme, and his monthly pay is more than Rs.15,000/-, then, he would not be required to contribute any amount towards the Pension Scheme (as in case of his Indian counterpart).  However, this does not apply to IWs who are already members of the Pension Scheme before September 1, 2014. 

4.    Increase in cap on amount of monthly pay to be diverted to Pension Scheme: Paragraph 3(2) of the Pension Scheme has been amended to specify that where monthly Pay of a member covered under the Pension Scheme exceeds Rs. 15,000/-, the contribution payable by the employer would be limited to the amount payable on his pay of Rs. 15,000/- only (earlier the limit was Rs. 6,500/-).

The above cap does not apply to IWs from non-SSA countries, who are otherwise required to become or are a member of the Pension Scheme.  In other words, pension will be payable on 8.33% of total monthly pay for such employees.

5.    Option to contribute pension on basis of higher salary: Prior to September 1, 2014, a resident employee could choose to contribute to Pension Fund under the Pension Scheme, beyond the amount payable on a monthly pay of Rs. 6,500/, by virtue of proviso to Paragraph 11(3) of EPS Scheme. 

The said proviso has now been omitted. Accordingly, the option to contribute to Pension Fund on a monthly pay higher than Rs. 15,000/- is no longer available to new resident members. 

This provision does not affect persons who were already contributing to Pension Fund on a higher salary before September 1, 2014. Such persons may continue to contribute on salary exceeding Rs. 15,000/- per month, subject to the following:

(a)   Such option must be exercised by the existing member by February 28, 2015 (extendable by RPFC by 6 months, on sufficient cause shown by member);

If the member exercises no option within such period (or extended period), it would be deemed that member has not opted for contribution over wage ceiling of Rs. 15,000/-. 

(b)   Such members would have to contribute @1.16% of monthly pay exceeding Rs.15,000/- as an additional contribution, from and out of the contributions payable by the employees for each month. 

6.    Increase in cap on amount of monthly pay for purposes of contribution to the Employees’ Deposit Linked Insurance Scheme (“EDLI Scheme”): As in the case of Pension Scheme, the EDLI Scheme has been amended to provide that contribution under EDLI Scheme shall be limited to a monthly pay of Rs. 15,000/- only, if monthly pay of employee exceeds said amount. The above cap applies to international workers also.   

7.    Furthermore, the benefits payable under Paragraph 22 of the EDLI scheme on death of an employee etc have been increased by 20%. 

8.    Summary of contributions under EPF Act consequent to the above amendments is specified separately for normal employees and for international workers as under:

Domestic employees

(a) Employee’s contribution to PF - 12%[2] of ‘monthly pay capped at Rs.15,000/-’, for existing members, and non-members who take up employment on or after 01/09/2014

(b) Employer’s contribution to PF - 12% of ‘monthly pay capped at Rs.15,000/-’,  for existing members and non-members who take up employment on or after 01/09/2014

(c) Proportion of employer’s contribution in (b) above, which is to be diverted to Pension

- For non-member who has joined on or after 01/09/2014: Nil if monthly pay > Rs. 15,000/-, else same as for existing members below;

- For existing members of PF or Pension Scheme - 8.33% of monthly pay capped to Rs. 15,000/-[3]

(d) Employers’ contribution to EDLI - 0.50% of ‘monthly pay capped at Rs.15,000/-’, for existing members, and non-members who take up employment on or after September 1, 2014.

Note that the employer and employee can choose to contribution to Provident Fund in excess of monthly pay of Rs. 15,000/-.

International workers from non-SSA countries

(a) Employee’s contribution to PF - 12% of monthly pay, for existing members, and non-members who take up employment on or after September 1, 2014.

(b) Employer’s contribution to PF - 12% of monthly pay, for existing members, and non-members who take up employment on or after September 1, 2014.

(c) Proportion of employer’s contribution in (b) above, which is to be diverted to Pension

-         For non-member who has joined on or after September 1, 2014: Nil if monthly pay > Rs. 15,000/-, else same as for existing members below;

-         For existing members of PF or Pension Scheme - 8.33% of monthly pay;

(d) Employers’ contribution to EDLI - 0.50% of ‘monthly pay capped at Rs. 15,000/-, for existing members, and non-members who take up employment on or after September 1, 2014.

- Madhusudan Bose



[1]Pay’ includes basic wages with dearness allowance, retaining allowance (if any) and cash value of food concessions.
[2] This will be 10% in case of specified establishments notified by the Central Government.
[3] No option to contribute to Pension Fund beyond cap after 01/09/2014.  Existing members who had earlier exercised this option may however continue to contribute in excess of the cap as before (please refer discussion above).  

3 comments:

Sethumadhavan Thekkeettil Paloor said...

How is it affecting retired employees?

Brian F. said...

Can you point out where in the Act or its amendments this can be found? In particular that the minimum salary of 15,000 INR does not apply to non SSA International Workers? I have heard it over and over again, but just want to see it with my own eyes.

Madhusudan Bose said...

Please refer to Rule 6(a) of Employees' Pension Scheme, 1995 as duly amended upto date.