V Anantha Nageswaran and Shruti Singh
On Vishwakarma Jayanti, the festival honouring workers and craftsmen, the government announced the long-overdue decision to revise the wage ceiling for Employees' Provident Fund Organisation (EPFO) from Rs 15,000 to Rs 25,000 per month. One would ask- how does a Rs 10,000 increase in the ceiling change anything? What is the need for this revision, and how does it impact the worker or the employer? So, let us start with the basics.
This statutory wage ceiling of Rs 25,000 serves as the threshold for mandatory EPF, Employees' Pension Scheme (EPS), and Employees' Deposit-Linked Insurance (EDLI) coverage. These three schemes are at the core of the social security net for salaried workers in India: a retirement/emergency fund; a pension corpus funded by employer contributions for payouts after retirement; and life insurance, also funded by employer contributions, to support families in the event of death. In all fairness, protection should not be anchored on a number frozen since 2014, even as wages, minimum wages, and living costs have continued to rise.
Under the earlier ceiling, any new employee joining with a monthly wage above Rs 15,000 was excluded from mandatory EPF coverage, ineligible for EPS, and outside EDLI protection. For an existing employee whose wage rose above the ceiling over time, the coverage didn't stop, but the pensionable wage under EPS was capped at Rs 15,000 regardless. One might argue that employees with higher wages could opt for voluntary coverage instead. The problem with that argument is that voluntary enrolment above the ceiling requires the employer's consent under a joint option, leaving the choice negotiable rather than guaranteed. With the increased ceiling, that coverage becomes an entitlement rather than a negotiation.
The raised ceiling doesn't fix everything for workers, but it does make the formal safety net a little fairer and a little wider. While the Rs 10,000 increase may seem modest, the 51 lakh additional workers it now covers under the social safety net are not. And unlike most entitlements, this one asks nothing of the worker to claim it.
Humans are famously bad at picturing and preparing for our future. Nobody budgets for the version of themselves that's sixty-five. We tend to opt for a smaller reward that comes sooner rather than a larger one that is delayed, which behavioural economics terms as ‘hyperbolic discounting’. As a result, with limited income, it is often harder to save and plan for a future self or situation than to meet immediate consumption needs. This is why the design of mandatory social protection contributions, such as those administered by the EPFO, is key. It works without relying on a worker’s willingness or willpower to save. The contribution towards pension is set aside before the income reaches the worker’s account – one can't spend what they never see. And slowly, every month, a small part of the wage gets set aside, building a retirement corpus you can also dip into for emergencies, plus a life insurance cover, all without you doing anything extra.
However, there's an employer cost associated with this revision. With the mandatory ceiling now raised to Rs 25,000, employers must extend statutory EPF coverage to a much larger workforce, and their monthly contribution obligations will also increase. Take a worker earning Rs 22,000/month who was previously outside mandatory coverage; the employer is now statutorily required to provide EPF cover for this employee. The employer must now contribute 12% of wages, split between the EPS pension scheme and the employee's own EPF account, amounting to Rs 2,640 per employee per month, or Rs 31,680 annually. Across 20 such employees, that's Rs 6,33,600 a year in additional payroll cost. Add to this the EDLI insurance contribution, which, although small, is now also calculated on a higher wage base. This is a real cost for employers when making hiring decisions.
A higher cost to the company seems like an obvious conclusion, but it is just a first-round effect, and the job market is much more nuanced than that. Higher EPF coverage serves as a hiring signal, attracting better-skilled, more productive workers, as new joiners consider more than just the monthly wage when evaluating a job. The coverage can also lead to higher retention. A worker with a pension and an insurance benefit will likely stay longer and start with a little more security. Forward-looking employers already understand this and offer voluntary coverage to attract the right talent.
The idea of social security is that, like a trampoline, it not only catches you but also enables you to bounce back. The system's core is to provide workers with a fund to draw from in times of emergency or at retirement, so that a temporary crisis does not become a lifelong hardship and trap them in debt.
Augmenting this are initiatives such as the Ayushman Bharat Pradhan Mantri Jan Arogya Yojana, which has made healthcare more affordable and accessible. The building of a skilling ecosystem for upskilling, reskilling, and new skilling, with strong industry linkages, to prepare for the changing nature of jobs. The Atal Pension Yojana (APY) extends contributory pension coverage further down the income ladder for those willing to take on investment risk and share in the benefits of economic and market growth. The trampoline is being strengthened one spring at a time.
(The authors are V Anantha Nageswaran, Chief Economic Adviser to the Government of India, and Shruti Singh, an officer of the Indian Economic Service. The views expressed are personal)
