The hike in wage ceiling will also enable entry of more workers under the EPFO, with the government estimating an addition of more than 51 lakh employees within the ambit of mandatory EPFO coverage.

The Union Cabinet Wednesday approved a hike in the wage ceiling for subscribers of the Employees’ Provident Fund Organisation (EPFO) from Rs 15,000 to Rs 25,000 per month, a revision after a gap of 12 years.

Union Minister of Labour and Employment Mansukh Mandaviya said the hike is expected to incentivise social security and formal employment, adding that the revised wage ceiling will be effective Thursday, which is also Vishwakarma Day.

The revision means over 8 crore workers will be mandated to contribute to the retirement fund for social security up to the wage limit of Rs 25,000, beyond which contributions will be voluntary. The monthly pension contribution, under the Employees’ Pension Scheme (EPS), will be capped at Rs 2,080, up from Rs 1,250 at present.

Both employees and employers contribute 12% of the employee’s basic salary, dearness allowance and retaining allowance, if any, to the EPF. The employee’s entire contribution goes to EPF, while the 12% contribution by the employer is split as 3.67% to EPF and 8.33% to EPS.

The government contributes 1.16% for an employee’s pension up to the wage ceiling. Employees do not contribute to the pension scheme.

The hike in the wage ceiling is expected to bring in an additional 51 lakh employees under the ambit of EPFO, and the government will have to bear the additional cost of Rs 1,089 crore – the annual government outgo on account of additional pension contributions will increase to about Rs 11,339 crore as against the existing annual budgetary support of about Rs 10,250 crore.

On average, the total EPF contribution for a worker is expected to go up by Rs 600 per month, as per official estimates.

One of the concerns raised by experts is that with the hike in the wage ceiling, employers will try to absorb it in the existing cost-to-company (CTC) structure, effectively reducing the take-home pay for workers with higher social security contributions.

“We have taken note of the concerns. Legally, the PF contribution from the employer’s side is not allowed to be deducted from the employee’s pay. We will reiterate this point when we issue the guidelines for the revised wage ceiling,” a senior government official said.

The hike in wage ceiling may also send a signal to the labour market and states about a higher wage scale for workers, experts said. At present, at least seven major states and Union Territories have the statutory minimum wages for unskilled workers above the Rs 15,000 wage ceiling: Delhi (Rs 17,800), Maharashtra (Rs 17,000), Karnataka (Rs 16,800), Haryana (Rs 16,500), Gujarat (Rs 16,000), Rajasthan (Rs 15,500), and Uttarakhand (Rs 15,220).

The increase in wage ceiling will expand access to provident fund savings, pension protection under the EPS and insurance protection under the Employees’ Deposit Linked Insurance Scheme (EDLI), a government release said. It will also enable the statutory contribution and pensionable-wage framework to better reflect prevailing wage levels, it stated.

Puneet Gupta, Partner, People Advisory Services-Tax, EY India, said, “This is expected to enhance retirement savings and social security coverage for employees. However, it will also have a direct cost implication for employers through higher PF, pension and EDLI contributions, particularly for employees currently drawing wages between Rs 15,000 and Rs 25,000 where contributions are restricted to the statutory ceiling. Employees in the affected salary bracket are also likely to witness a reduction in take-home pay due to the higher employee PF contribution.”

K E Raghunathan, National Chairman, Association of Indian Entrepreneurs (AIE) and a former employers’ representative on the EPFO Board, said the hike in wage ceiling was a long-pending reform, and there could be some increase in operating costs, particularly for manufacturing and MSMEs, in the short term. But in the long run, stronger social security for workers is an important investment in India’s workforce, he said.

The government last hiked the EPFO wage ceiling to Rs 15,000 from Rs 6,500 in September 2014. “The present decision carries forward this approach by further raising the ceiling to Rs 25,000 to reflect the sustained wage growth, rising incomes, and a continued expansion of formal employment over the intervening years,” the official release stated.