After the government increased the mandatory wage threshold for PF from 15,000 to 25,000 rupees per month, discussions have arisen regarding the rules applicable to employees with basic salaries above 25,000 rupees. According to the government statement, this change, which occurred following the 2014 amendments, has allowed approximately 510,000 new employees to fall under the scope of PF, pensions, and free life insurance. The main objective of this decision is to cover millions of workers in both formal and informal sectors of the country with a broader social security system. However, the increase in PF contributions will lead to a slight reduction in net salary.
Previously, if an employee was newly employed with a basic salary exceeding 15,000 rupees per month, opening a PF account was not mandatory. This was because the average and minimum wage levels in the country had significantly increased since 2014, making the old limit irrelevant. Raising the threshold for mandatory contributions will increase workers' monthly savings, which will form a larger pension fund in the long run.
Existing norms stipulate that under the old limit (15,000 rupees, 12% employee contribution), the monthly contribution was 1,800 rupees. Under the new limit (25,000 rupees, 12% employee contribution), this contribution increases to 3,000 rupees per month. Both the company and the employee contribute 12% of the amount. Thus, at a ceiling of 25,000 rupees, the employee's salary may decrease by 1,200 rupees, as the contribution amount increased from 1,800 to 3,000 rupees.
The question arises about which rules apply if the basic salary is 40,000 or 50,000 rupees. The rule states that the company is legally obligated to contribute its share only up to the 25,000 rupee limit, which amounts to 3,000 rupees. Consider this example: Rakesh works in a private company, and his basic salary is 50,000 rupees. Since the company operates on a CTC structure, it can deduct 12% of Rakesh's entire basic salary (6,000 rupees) into PF. The company will also contribute 6,000 rupees, but these funds will be accounted for in Rakesh's CTC package, leading to a reduction in his net salary because the company assumes the obligation only up to the 25,000 rupee limit, i.e., 3,000 rupees.
If an employee's basic salary is 40,000 rupees per month, there are two options. The first option—most private companies contribute to PF only within the mandatory legal limit. In this case, the employee's contribution will be 12% of 25,000 rupees, which is 3,000 rupees per month. The employer's contribution (12%) will be divided into EPS (Pension Fund - 8.33%): 2,083 rupees/month, and EPF (Future Fund - 3.67%): 917 rupees/month. Thus, despite the basic salary of 40,000 rupees, only 3,000 rupees will be deducted from the employee's salary per month.
The second option—contributing PF from the entire basic salary, i.e., 40,000 rupees. If the company and the employee agree, they can contribute 12% of the entire basic salary to PF. The employee's contribution will be 12% of 40,000 rupees, which equals 4,800 rupees per month. The employer's contribution will total 4,800 rupees per month. However, the contribution to EPS (Pension Fund) will remain limited to the 25,000 rupee limit, i.e., 2,083 rupees per month (unless a high pension option is chosen). The remaining part will go to EPF, i.e., 2,717 rupees/month. In this case, 4,800 rupees will be deducted from the employee's salary per month, and this is the amount the company will contribute to the overall PF/pension fund; however, the employee's net salary will decrease.