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Revised Schemes For Social Security In India

Published on Mon, Sep 08,2014 | 22:46, Updated at Mon, Sep 08 at 22:46Source : 

By: Surabhi Marwah, Tax Partner - EY

The 100 day anniversary of the new government was witness to a significant modification in the social security regime in India. Further to the Finance Minister’s proposal, put forward by him in his budget speech this year, the Ministry of Labour and Employment on 22 August 22, 2014raised the statutory ceiling for monthly salary for the purpose of calculating contributions under the Indian social security schemes (namely the provident fund (PF) scheme, pension scheme and the deposit linked insurance scheme) from INR 6,500 to INR 15,000.Further,minimum monthly pension benefit of INR 1,000 was also introduced under the pension scheme.

As per the amendment, w.e.f September 1, 2014, all employees having a monthly salary up to INR 15,000 shall be mandatorily covered under all the three schemes and shall be required to make monthly contributions. In case an employees’ monthly salary is higher than INR 15,000, he may opt out of the PF scheme (if not already a member). If such employee voluntarily opts for membership, it is essential that the monthly contribution is made on at least INR 15,000 unless an option to contribute on a higher salary is exercised.

The mandatory inclusion for PF members under the pension scheme has also now been done away with. Employees drawing monthly salary in excess of INR 15000, who are not existing members of the pension scheme, will now not be eligible for membership under the pension scheme. A reading of this suggests that this amendment is also applicable for International Workers. Thus, an International Worker assigned to India on or after 1September, 2014 will only be required to become a member of the PF scheme and for such an individual, the entire employer and employee share of contribution (24% of monthly salary) will be allocated to the PF Scheme.

The amendments were introduced by the Government with the intent to address the coverage gaps in social security schemes for individuals and to consciously extend the benefit of social security to a wider range or class of employees. The Circulars specify a laundry list of such employees and some of those who willow be covered in the net are employees of government departments, individuals in the banking, real estate and health care industries employed through third party vendors, individuals employed in schools, hospitals, hotels, restaurants, show rooms of branded companies etc.  

In addition to the bridging of coverage gaps, the Government also seeks to benefit members by increasing the ‘monthly pensionable salary’ for pension benefit calculation to INR 15,000and also increasing the lump-sum benefit available under the deposit-linked insurance scheme on the death of an employee by 20%.

Whilst this is welcome news for some individuals, it may mean a reduction in take home and a bonus in the retirement account for others. Thus, planning is the call of the day.  

From the employers' perspective, a review of coverage under the social security schemes is recommended to ensure timely and accurate compliance with the amended schemes. In particular, employers registered under the PF law should:

-          Review their employee population and cover all employees with monthly salary up to INR 15000 as members of PF scheme.

-          Review salary structures and current payroll processes to ensure correct deduction and deposit of contributions under various schemes w.e.f September 1, 2014.

-          Review coverage of all employees for whom contribution towards pension scheme is made on monthly salary exceeding INR 15,000.

-          Ensure correct compliance and coverage for International Workers

A conscious effort should also be made by employers to educate employees of the benefits of membership under such schemes and a reiteration of the systematic investment benefits flowing from these.

This is a constructive and welcome step taken by the Government to aid the low wage earners and to promote a socially empowered society in India. Careful planning shall however be required to ensure availability of sufficient Government reserves to cover the increased social security payouts expected in the future.

(Sachin Hans, Senior Tax Professional, EY contributed to the article)

(Views expressed are personal)


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