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New PF rule may lower take - home pay
For most employees, the first thing that comes to mind at the thought of social security is Provident Fund — a fund to which they contribute 12 per cent of their salary each month and hope of saving money for their old age.
Social security in India is administered under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (the EPF Act). The EPF Act comprises three pillars — Provident Fund (PF), pension scheme and insurance scheme.
While the PF provides lump sum payment on an employee's retirement, resignation or death, the pension scheme benefits her with monthly pension post retirement. As the name suggests, the insurance scheme provides life insurance cover to an employee.
The government has made radical changes to all the three schemes effective September 1, 2014.
Prior to September 1, 2014:
An employee with monthly salary of up to ₹ 6,500 was a member under the three schemes. The membership was voluntary for an employee with monthly salary exceeding the limit of ₹ 6,500.
Twelve per cent of the salary contributed by the employee was deposited fully into the PF.
Matching contribution made by the employer was allocated as under: 8.33 per cent of ₹ 6,500 per month into the pension scheme and balance to PF.
Salary for the purpose of calculating contributions was limited to ₹ 6,500 per month unless the employer and employee had opted to contribute on a higher salary.
Change from September 1, 2014:
The existing salary limit of ₹ 6,500 has been increased to ₹ 15,000, thereby expanding both membership base and the quantum of contributions.
Now an employee with monthly salary above ₹ 6,500 but up to ₹ 15,000 will also be covered under the three schemes. Unlike PF and insurance scheme, voluntary membership is not available under the pension scheme for an employee with monthly salary of above ₹ 15,000.
With the new salary limit of ₹ 15,000 for calculating availed to contribute on a higher salary.
For instance, Sovan Sarkar, who is an office helper with a multinational company earns a monthly salary of ₹ 12,000. Though he was already contributing ₹ 780 per month ( 12 per cent of ₹ 6,500) towards PF, now he will have to shell out an extra ₹ 660 every month taking his contributions to ₹ 1,440 each month ( 12 per cent of ₹ 12,000).
Similarly, even his employer's contribution will increase to ₹ 1,440 every month, which will be allocated as follows: ₹ 1,000 ( 8.33 per cent of ₹ 12,000) towards pension Scheme and the balance ₹ 440 towards PF. The employer would deposit an additional ₹ 60 ( 0.5 per cent of ₹ 12,000) towards insurance scheme for Sarkar.
For employees earning monthly salary exceeding ₹ 15,000, the membership is voluntary. For new members joining the scheme on or after 1 September 2014, the contribution is required to be made only under the PF and insurance scheme – as such employees are not eligible for membership under the pension scheme. Members limiting monthly contributions on salary of ₹ 6,500 earlier will now have to contribute on at least salary of ₹ 15,000.
Naveen Kumar, a young graduate in his first job, earns a monthly salary of ₹ 20,000. Effective September 1, Naveen's savings will rise as the contributions will increase to ₹ 1,800 ( 12 per cent of ₹ 15,000) as employee's share to the PF, ₹ 1,250 ( 8.33 per cent of ₹ 15,000) as employer's share to the pension scheme and balance ₹ 550 as employer's share to the PF.
For Hardip Singh, who earns the same salary as Kumar, but has taken up his first job after 1 September 2014, both the employer's and employee's share ( 12 per cent of salary each) will be allocated fully to the PF.
On a whole, in spite of a possible impact on the monthly take- home salary, the revision of statutory salary ceiling to ₹ 15,000 may do wonders for retirement savings.
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