Two key changes in the Employees Provident Fund and the Atal Pension Yojana could give you a higher pension when you retire. The first proposal aims at raising your basic salary component within your pay package to increase the EPF saving and its associated EPS pension. The second proposal seeks to double the maximum monthly pension under APY from Rs 5,000 to Rs 10,000. Note that both these changes are only government proposals at present and have not been enacted into law.
Raising Basic Salary for EPF
The Employees Provident Fund or EPF contribution is taken at 12% of basic pay and dearness allowance. The employer contributes 12% of this amount (basic pay + dearness allowance) and it deducts another 12% from your salary towards PF contribution. However many employers keep the basic salary as a small component of overall salary structure. They allocate a much higher amount to various allowances like house rent allowance, transport allowance etc. This keeps the PF contribution also low.
For instance, if your total salary is Rs 50,000 per month, your employer may keep basic salary at only Rs 18,000 and distribute the balance Rs 32,000 between various allowances. As a result, it only has to contribute 12% of Rs 18,000 which is Rs 2160 a month towards PF and deduct another Rs 2160 from your take-home pay. This keeps the Cost-to-Company or CTC low.
The government has proposed restricting the non-basic pay component of the salary to 50% of the total salary. In the above example, this would raise your basic salary to Rs 25,000 and hence raise the employer PF contribution to Rs 3,000. It would force the employer to increase the PF deduction from your pay to Rs 3,000. Note that this only changes the structure of your salary and does not directly raise it. The only real increase is in the employer’s share of the PF contribution. However, employers are likely to make up for the higher cost by cutting remuneration elsewhere such as bonuses or increments.
So what does this proposal mean for you? On the positive side, your monthly PF contribution (along with employer contribution) will go up. On the other hand, your take-home pay will come down because a higher amount will have to be deducted. It is also possible that employers who are suddenly faced with higher CTCs will make up for the cost by reducing variable components like bonuses or slow down on increments.
Raising maximum pension under APY
The Atal Pension Yojana or APY is open to all citizens of India between the age of 18 and 40, whether employees, self-employed or unemployed. The APY pays you a pension of Rs 1,000 to Rs 5,000 per month in return for a fixed monthly contribution starting as low as Rs 42. The monthly contribution changes depending on the age at which you join the APY. The maximum joining age is 40 and you become eligible to receive the pension at the age of 60. You can read more about it here.
The government has proposed to hike the maximum pension under APY from Rs 5,000 to Rs 10,000. Note that this is likely to be associated with higher monthly contributions. In other words, people who wish to get a Rs 10,000 pension will have to pay a higher sum into the scheme. However, the higher maximum limit is likely to make the APY more attractive. Rs 10,000 several decades down the line is a lot more attractive than Rs 5,000 several decades down the line.