Amendments to social security parameters in India

November 2014 | EXPERT BRIEFING | EMPLOYMENT LAW

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Labour laws in India place a great emphasis on the social and economic security of the common man. The Indian government offers many schemes by which individuals working in any organisation can build a corpus through regular deductions from their wages and an equal contribution from their employer under a pension plan contribution by the government – mainly the Employees Provident Fund (EPF) and the Employees’ Pension Scheme (EPS). In addition, the Indian government also offers a separate insurance scheme, the Employees’ Deposit-Linked Insurance Scheme (EDLI), for the benefit of certain employees.

These social security schemes are designed to encourage savings especially for lower income employees, so that any employee or his or her family is eligible to receive some form of income in the case of death, disability, retirement or superannuation. These schemes are applicable in general to every organisation with 20 or more employees. Once the scheme is initiated on the basis of employee numbers, the relevant laws continue to apply even if the employee number falls below 20. There is also a provision for an organisation to voluntarily join the scheme even if it does not meet the mandatory threshold.

The year 2014 has witnessed a series of amendments in labour laws pertaining to local labour specifically. The scope and benefits under the Employees’ Provident Fund Scheme 1952 have been widened effective from 1 September 2014, as announced in the national, annual budget of 2014. Subsequently, the Employee Provident Fund Organization (EPFO), the umbrella body responsible for the social security mechanism under the aegis of the Ministry of Labour and Employment, has issued guidelines to implement amendments to the various schemes under the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (EPF Act): the Employees’ Provident Fund Scheme 1952 (PF Scheme or EPF); the Employees’ Pensions Scheme 1995 (Pensions Scheme or EPS); and the Employees’ Deposit-Linked Insurance Scheme, 1976 (EDLI Scheme).

The Employees’ Provident Fund Scheme (EPF Scheme)

Till now, the EPF Scheme applied to employees who received a wage of not more than INR 6500 per month. This threshold has now been raised to INR 15,000. Wages include basic wages with dearness allowance, retaining allowance and cash value of food concessions.

Every employer will now have to make the mandatory 12 percent contribution towards the EPF for each employee whose monthly wage is not more than INR 15,000. Thus it is obligatory for an employee drawing a wage of up to INR 15,000 per month to enrol as a member of the EPF and any employee who earns more than INR 15,000 a month will be considered an ‘excluded employee’. Any new employee who earns INR 15,000 or more may opt to be included in the EPF Scheme but cannot participate in the pension scheme described below.

Employees who were earlier earning a wage of more than INR 6500 per month but did not contribute to the EPF will now have to enrol under the EPF from 1 September 2014 provided their wage is not more than INR 15,000 per month.

The Employees’ Pensions Scheme 1995 (Employees’ Pension Scheme)

The Indian government contributes 1.16 percent to the pension of every member of EPF as part of the Pension Scheme run by the EPFO.

Every month, a salaried worker contributes 12 percent of his or her salary to EPF and the employer matches the investment. From what the employer contributes, 8.33 percent or INR 541 (whichever is lower) goes into the EPS, which offers pension for life after the age of 58 years. Hitherto, employees that earned not more than INR 6500 per month were eligible for this benefit. After the recent changes in September 2014, employees that receive a monthly salary that is not more than INR 15,000 are covered under the EPS.

In addition, the pensionable wage will be the average wage earned for 60 months before the date of the exit from the EPF as opposed to the earlier applicable period of 12 months.

Some other changes include the Ministry of Labour and Employment’s separate amendment prescribing a minimum monthly pension of INR 1,000 (approximately US$17) which shall include any relief payable to an existing or future member for the financial year 2014-2015; the minimum ‘monthly children pension’ payable in case of the death of a member has been increased from INR 150 to INR 250 for the financial year 2014-2015; and the minimum ‘monthly orphan pension’ which is payable where a deceased member is not survived by any widow or where the pensions is not payable to the widow (for example, if she were to re-marry) has been increased from INR 250 to INR 750 for the financial year 2014-2015.

The central government will contribute a maximum of INR 174 per month per eligible employee to the EPS (which is 1.16 percent of INR 15,000).

Those employees who had been earning more than INR 6500 and were part of the EPS may continue to participate in the scheme even if their current wage is more than INR 15,000. However, this option has to be jointly exercised by both employee and employer before 1 March 2015 and such employees will have to pay the central government contribution of 1.16 percent out of his own earnings.

The Employees’ Deposit-Linked Insurance Scheme (EDLI Scheme)

The Employees’ Deposit-Linked Insurance Scheme (EDLI) is a part of the EPF by which an employee is entitled to automatic insurance cover. The EDLI is set up to provide a lump sum payment to the employee’s nominated beneficiary in the event of death due to natural causes, accident or illness. In the amended EDLI scheme, if an employee dies on or after 1 September 2014, the benefit will be calculated on the enhanced wage limit of INR 15,000 per month.

Conclusion

These amendments serve not only to increase the overall pension benefits but also increase the insurance cover in the event of the death of an employee. The higher contribution to EPF or EPS will impact the net take home pay of employees. Employer contributions will also increase significantly as a large number of hitherto ineligible employees will become eligible for these benefits due to the enhanced entry threshold.

Poorvi Chothani is a founder and managing partner of LawQuest. She can be reached via email: poorvi@lawquestinternational.com.

Poorvi Chothani

LawQuest