Higher EPF contribution on basic + allowances: Calculate increase in EPF corpus!

Published: March 1, 2019 at 2:48 pm

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The supreme court recently ruled that allowances that are ordinarily paid to all employes should be considered for deciding the EPF contribution and not just the basic pay as usually done. This means normal allowances like house rent, dearness transport, fall under the definition of “basic wages”. A look at how much your EPF corpus is likely to increase if the EPFO agrees to this ruling. You can also download the calculator linked below to calculate for your own case.

Higher EPF contribution on basic + allowances

The judgement can be downloaded from the supreme court of India website. The court ruled that any allowance that is variable from employee to employee depending on their work output (e.g. over time allowance) will not be used for the PF contribution. Only those allowances normally paid to all employees will be used to compute PF contribution.

Higher EPF contribution on basic + allowances: Calculate increase in EPF corpus!

Impact on EPF corpus: Basic + allowance is 25% higher than basic

First let us consider a simple case where the basic is Rs. 10,000 and bscis + allowance is 25% higher than the basic or Rs. 12,500. Assuming a constant interest rate of 8%, all other rules being the same, we get the following:

EPF corpus with PF contribution = 12% of basic (employee contribution) + 3.67% of basic (employer contribution) = Rs. 6.56 lakh.

EPF corpus with PF contribution = 12% of basic + allowance (employee contribution) + 3.67% of basic + allowance (employer contribution) = Rs. 8.41 lakh. That is 28% higher.

However the EPF contribution will be 25% higher for initial few years and a bit higher later (basic pay is assumed to increase at 3%)

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Impact on EPF corpus: Basic + allowance is 50% higher than basic

Next let us consider a basic of Rs. 25,000 (above the threshold of Rs. 15000, meaning the EPS contribution will change as explained here) and a basic + allowance of Rs. 37,500 (50% higher) After 15 years:

EPF corpus with only basic used for contribution = Rs. 20.71 lakh

EPF corpus basic + allowances used for contribution = Rs. 33.26 lakh (or 60.6% higher!). However, the PF contribution will also be 60% higher reducing the take home pay.

Here is a snapshot of the inputs and outputs in the calculator linked below:

Higher EPF contribution on basic + allowances calculator inputs and outputs screenshotSchedule with only basic used for deciding PF contribution

Higher EPF contribution on basic + allowances: schedule of investments with only basic considered for PF contribution

Schedule with basic and allowances used for PF contribution

Higher EPF contribution on basic + allowances: schedule of investments with basic and allowances considered for PF contribution

Download the EPF corpus calculator: basic only vs basic + allowances

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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4 Comments

  1. Sir, basic question on EPF contribution. Can it be considered as debt contribution while investing? If yes, then I actually started equity(MF) investment late. Should I put only in equity till I reach the 60% equity +40% debt ratio?

  2. Sir, basic question on EPF contribution. Can it be considered as debt contribution while investing? If yes, then I actually started equity(MF) investment late. Should I put only in equity till I reach the 60% equity +40% debt ratio?

  3. Hi Patty
    The PF contribution for private sector employees can be limited to 15,000. Hence if an org is currently contributing 12% of 25000 (where 25000 is the basic), nothing changes for either employee or employer after the ruling. Authorities cannot force a higher contribution since one is already above the prescribed manadate. Life however changes for employees with below 15,000 as old basic. Not sure if the same applies to public sector

  4. Hi Mr. Pattu,

    I think it will lead to a lot of tax savings for people above the threshold limit . Salary will go from the CTC into the EPF contribution ( employer contribution should bring the tax savings) . Is there anything I am missing ?

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