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Govt plans to amend EPF: Allow switch from EPS to NPS, protect PF dues in case of bankruptcy

Here is a look at the three major changes proposed in the EPF Act as per the draft bill.

, ET Online|
Updated: Sep 20, 2019, 03.29 PM IST
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Another proposal in the draft bill is the amendment in the definition of 'wage'.
The government has prepared a draft bill proposing major amendments in the Employees' Provident Fund (EPF) and Employees' Pension Scheme (EPS). As per the draft bill, EPF members will have the option to switch their money from EPS to National Pension System (NPS).

Another proposal is to replace the existing definition of 'wage' (in the EPF Act) with a new one as mentioned in the Code of Wages, 2019. The new definition of wages is likely to impact the EPF contribution of those employees whose basic salary is currently less than Rs 15,000.

To protect the employees of companies undergoing liquidation under the Insolvency and Bankruptcy Code (IBC), amendments are also proposed to give priority to the payment of PF contribution over other debts.

The Ministry of Labour and Employment has uploaded the copy of the preliminary draft of the Employees Provident Funds and Miscellaneous Provisions (Amendment) Bill, 2019 on its website seeking comments on August 23, 2019. The last date to provide the comments is September 22, 2019.

Here is a look at the three major changes proposed in the EPF Act as per the draft bill.

  • Option of switching from EPS to NPS
Puneet Gupta, Director, EY India says, "The draft bill proposes to allow the current and new EPF members to switch the contribution currently being made to the EPS to NPS."

As per the current laws, 12 per cent of the basic salary (can be capped at Rs 15,000) is contributed by the employee to his EPF account. The employer makes a matching contribution. Out of employer's contribution, 8.33 per cent goes into EPS. Also, the EPS contribution is calculated on a basic pay of Rs 15,000 or actual basic pay whichever is less. Therefore, if basic exceeds Rs 15,000, then EPS contribution will be calculated as 8.33 per cent of Rs 15,000 which is Rs 1250 per month.

Gupta says, "The draft proposal of allowing EPF members to switch from EPS to NPS is likely to benefit them as pension amount you are eligible for under EPS scheme is calculated on the basis of a prescribed formula. Also, pension amount under the EPS scheme yields a comparatively meagre amount because contribution under EPS is capped. If a person switches to NPS, the amount of pension he/she will be eligible for will be as per the rules and regulations of the NPS scheme and on the basis of corpus accumulated. Further returns in case of NPS are linked to the market."

As per the draft bill, a person will also have the option of switching back from NPS to EPS.

Gupta adds, "As per the draft proposal, the option of switching from EPS to NPS would not affect the existing regulation regarding EPF contribution. You will continue to receive benefits that you are currently getting on your EPF corpus. The rules relating to conditions and limit of wages for contribution to NPS are yet to be prescribed."

  • Repayment of EPF dues over other debt
To protect the interest of employees of those companies who are undergoing the resolution process under the Insolvency and Bankruptcy Code 2016 (IBC), the draft bill proposes to give priority to the EPF dues of the company over its other debts.

Gupta says, "The proposal seeks to give priority to the payment of EPF contribution due over other debts. This would mean that money received on sale of the assets of the stressed company will be first utilised to pay the EPF contribution and the balance will be used to settle other debts."

  • Amendment in the definition of wages to calculate EPF contribution
Another proposal in the draft bill is the amendment in the definition of 'wage'. This proposal is likely to affect those whose current basic salary does not exceed Rs 15,000 per month.

"As per the current law, for your EPF contribution, wage is defined as sum of basic pay, dearness allowance (DA) and retaining allowance. If your basic pay exceeds Rs 15,000 then your EPF contribution may be calculated only on basic pay. However, if your basic pay does not exceeds Rs 15,000 then all the other allowances (except for house rent allowance, overtime allowance, bonus, commission or presents by the employer) will also be included to calculate the EPF contribution. This follows a recent Supreme Court ruling clarifying the definition of wages," says Gupta.

The new proposed definition of 'wage' for EPF contribution includes basic, DA and retaining allowance and all other allowances such as special allowance, LTA etc. except for certain specified allowances and benefits. For the purpose of calculation of EPF contribution, the limit of Rs 15,000 still remains. The excluded allowances and benefits, as per new proposed definition, are as follows:
a) Bonus payable under any law
b) Value of any house accommodation
c) Contribution paid by employer to any pension or provident fund and interest which may have accrued thereon.
d) Conveyance allowance or travelling allowance
e) House rent allowance
f) Overtime allowance
g) Commission payable

However, specific allowances / benefits are proposed to be included for the calculation of EPF contribution if total of such specific allowances / benefits exceeds 50 per cent or other percent (which will be notified by the government) of total salary which is paid to the employee.

Gupta explains this with an example. Suppose your monthly salary is Rs 30,000. The break-up of your salary is as follows:

Amount (In Rs.)





Conveyance allowance


Now because the sum of HRA and conveyance allowance i.e. Rs 14,000 does not exceed 50 per cent of your monthly salary(50% of Rs 30,000), therefore, your PF contribution will be calculated using basic pay subject to the overall cap of Rs 15,000.

Now if suppose, the break-up of your salary is as follows:

Amount (In Rs.)





Conveyance allowance


As the sum of HRA and Conveyance allowance (Rs 18,000) exceeds the 50 per cent of your monthly salary (50% of Rs 30,000), therefore your PF contribution will be calculated by adding these two allowances to the extent the sum of these exceeds 50 per cent of the salary, under the overall limit of Rs 15,000.

Also Read

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Investing in NPS to cost more. Here's why

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How NPS funds have performed

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