EPF wage ceiling hike: 'It is not a raise. It is a structure', impact on take-home pay

The increase in the EPF wage ceiling has raised an important question for both employers and employees: Who ultimately bears the additional contribution cost?

The higher ceiling could mean increased contributions for some employees and employers, depending on how their existing EPF contributions are structured. It could also have implications for take-home pay and the way companies structure compensation.

The key question is whether employers can adjust other components of an employee’s compensation to absorb the additional EPF cost, and what employees can do if their take-home pay is reduced as a result.

Legal experts say the increase in an employer’s statutory EPF liability cannot simply be passed on to employees by reducing wages or employment benefits.

Shoubhik Dashgupta, Partner at Pioneer Legal, said an employer cannot reduce an employee’s overall CTC merely because its statutory EPF contribution has increased.

Referring to Section 124 of the Code on Social Security, 2020, Dashgupta said the provision restricts an employer from reducing, directly or indirectly, an employee’s wages or employment benefits because of the employer’s liability to make statutory contributions.

Section 124 itself states that an employer cannot, merely because of its liability to make contributions under the Code, reduce an employee’s wages or the total quantum of benefits available under the terms of employment.

Dashgupta also said the employer’s contribution cannot be recovered from the employee under the EPF framework.

However, he said employers may have some scope to make changes to future discretionary components, such as annual increments, bonuses and other discretionary payments.

Pooja Rao Putrevu, Founder of Annex Legal, similarly said Section 124 places restrictions on reducing wages and employment benefits because of an employer’s statutory contribution liability.

“Keeping the intention of the raise in mind, raising the CTC is the safer option,” Putrevu said. She added that any adjustment could be made in payments that are not subject to a statutory mandate.

Putrevu also said employers should ensure that any revised salary structure is properly documented and should not arbitrarily reflect changes in an employee’s payslip.

Can employees challenge a reduction in take-home pay?

“An employee may have grounds to challenge a reduction where the employer seeks to recover its own additional EPF liability by reducing the employee’s wages or otherwise altering contractual employment benefits,” Dashgupta said.

He added that the precise remedy would depend on the employee’s contractual terms, the salary component that has been reduced and the manner in which the restructuring has been implemented.

Putrevu said an employee’s own higher EPF contribution may lawfully reduce take-home pay.

However, she said a statutory change should not, by itself, result in a reduction in take-home pay through an employer adjustment. She added that an employee could approach the labour courts for relief if the employer’s action potentially amounts to a contractual breach.

Compensation restructuring: What employers could consider

Vibhore Goyal, Founder of OneBanc, approaches the issue from the perspective of employee take-home pay and overall employer cost.

Goyal argues that companies already have tools available under tax rules to restructure compensation without necessarily increasing their overall cost.

He pointed to components such as meal benefits, fuel and vehicle-related allowances and gifts, and cited the applicable limits for these components in making his case.

“For an employee on ₹24 lakh, that is more than ₹50,000 back in hand, at unchanged cost to company,” Goyal said, referring to his calculation based on the tax structures he cited.

“It is not a raise. It is a structure,” he said.

Goyal also cited estimates relating to EPF contributions, EPS flows, salary increments and attrition to argue that employers could consider restructuring compensation following the increase in the EPF wage ceiling.

These figures and the resulting assessment of their impact are Goyal’s calculations and views.

The ceiling had last been revised in September 2014, when it was increased to ₹15,000.

Legal experts say the distinction between an employee’s own higher EPF contribution and an employer seeking to recover its statutory liability through salary reductions will be important when assessing the impact on take-home pay.