Govt hikes wage ceiling for EPF coverage: We calculate how this could impact your pension payout at retirement

The Union Cabinet on Wednesday, after a 12-year gap, approved raising the wage ceiling eligibility for Employees Provident Fund (EPF) coverage by ₹10,000, from the ₹15,000 set in 2014, according to a statement from Union Information and Broadcasting Minister Ashwini Vaishnaw.

According to an official government release, the ceiling has been hiked to “reflect sustained wage growth, rising incomes and continued expansion of formal employment over the intervening years”.

What are the benefits of the wage ceiling raise?

The wage ceiling for membership to the Employees’ Provident Fund Organisation (EPFO) has been raised to ₹25,000 per month, bringing an additional 51 lakh employees under mandatory provident fund cover, and widening social security coverage for workers. Notably, the EPFO also administers pension under the Employees’ Pension Scheme (EPS) and insurance protection under the Employees’ Deposit Linked Insurance Scheme (EDLI).

The latest EPFO data shows around 7.98 crore contributing members across about 7.68 lakh contributing establishments, while the EPS provides pension benefits to around 82 lakh pensioners.

Today, we calculate how this decision can impact your pension and how much increase in payout you could expect:

How will EPF wage ceiling increase impact pension payout?

The EPFO's pension benefit is available to all subscribers who have had an account for more than 10 years. Under this, 8.33% of the 12% employer contribution to your EPF account is directed towards your EPS account. Further, the government also contributes 1.16% (subject to wage ceiling) towards the fund.

Thus, with both the employer and government contributions subject to the wage ceiling, the total accumulated corpus towards your final pension payout will increase.

At the time of retirement, members can withdraw their provident fund amount in full and choose to maintain an EPS annuity by availing a Scheme Certificate. As per the rules, 58 years is considered the age of retirement, and members can choose to delay pension payments till 60 years of age, by either:

• Pausing contributions for two years (lump sum earns 4% p.a. interest till 60 years, no interest after) or
• Continuing contributions for two years (a higher accumulated amount means a higher final payout).

Pensions are disbursed monthly to eligible members or beneficiaries (through banks / post offices). This includes superannuation pension, early pension, family pension, orphan/widow pension, and disablement pension. Notably, disbursement is ensured even if the employer defaults, as the EPFO guarantees benefits once membership conditions are met.

How is pension calculated? Will it increase?

Notably, pension is calculated using the average of the past five years' salary (subject to wage ceiling). This means that to fully reap the benefit of the higher bracket, you must have at least five years of service with the increased wage ceiling.

Formula is as follows: Pension = (Pensionable Salary (average of last 60 months) x Pensionable Service) / 70.

Here's a look at the pension calculation for every five years of increments:

• 10 years of service (minimum required for pension subscription)

Under previous wage ceiling, payout would be: (15,000 x 10) / 70 = 2,143

Under revised wage ceiling: (25,000 x 10) / 70 = 3,572

This is an increase of ₹1,429 per month in pension payouts.

• 15 years of service (increments of five since we need at least 60 months average)

Under previous wage ceiling, payout would be: (15,000 x 15) / 70 = 3,215

Under revised wage ceiling: (25,000 x 15) / 70 = 5,357

This is an increase of ₹2,142 per month in pension payouts.

• 20 years of service (doesn't have to be at the same company)

Under previous wage ceiling, payout would be: (15,000 x 20) / 70 = 4,286

Under revised wage ceiling: (25,000 x 20) / 70 = 7,143

This is an increase of ₹2,857 per month in pension payouts.

• 25 years of service

Under previous wage ceiling, payout would be: (15,000 x 25) / 70 = 5,357

Under revised wage ceiling: (25,000 x 25) / 70 = 8,929

This is an increase of ₹3,572 per month in pension payouts.

• 30 years of service

Under previous wage ceiling, payout would be: (15,000 x 30) / 70 = 6,429

Under revised wage ceiling: (25,000 x 30) / 70 = 10,714

This is an increase of ₹4,285 per month in pension payouts.

• 35 years of service

Under previous wage ceiling, payout would be: (15,000 x 35) / 70 = 7,500

Under revised wage ceiling: (25,000 x 35) / 70 = 12,500

This is an increase of ₹5,000 per month in pension payouts.

• 40 years of service (Those who start working at 20-21 years of age)

Under previous wage ceiling, payout would be: (15,000 x 40) / 70 = 8,571

Under revised wage ceiling: (25,000 x 40) / 70 = 14,286

This is an increase of ₹5,715 per month in pension payouts.

Disclaimer: This story is for educational purposes only. We advise investors to check with certified experts before making any investment decisions.