FINANCE SPECIAL............................. Social security schemes: A channel to save more

Social security schemes: A channel to save more

Do you eagerly wait for the salary credit in your bank account every month and then sadly watch it vaporize into EMIs, necessities, bills and other current obligations, with negligible savings?
Bearing this in mind, you choose to save a portion of your pay every month, even before it comes to you, by contributing towards Provident Fund and Pension Scheme. With 12% of your monthly pay and a matching contribution by your employer towards these schemes, you may save a decent amount by the time you retire. Therefore, for many of you, Provident Fund and Pension Scheme may be a big saving to rely upon for a secured future.

Considering the benefits available under the Provident Fund and Pension Scheme, the Finance Minister of India, on 10 July 2014 while presenting his budget speech, proposed to bring a larger group of people mandatorily under the ambit of these schemes. These proposals were made a reality on 22 August 2014 when the statutory salary ceiling was enhanced to INR 15,000 from the existing INR 6,500 under the Provident Fund and Pension Scheme.

This means that earlier, you were mandatorily required to become member of the Provident Fund Scheme if your monthly pay was up to INR 6,500. For all those of you earning above INR 6,500 monthly, you had an option of voluntary membership under the Provident Fund Scheme.

However, with effect from 1 September 2014, if you are earning monthly pay of up to INR 15,000, then you will be mandatorily required to become a member and contribute towards Provident Fund Scheme with your employer also making a matching contribution.

If your monthly pay exceeds INR 15,000, then you may still opt for voluntary membership under the Provident Fund Scheme unless you are already a member. In case you opt for voluntary membership, you and your employer will have to make monthly contributions on minimum INR 15,000 unless an option to contribute on a higher pay is exercised.

Changes were made in the Pension Scheme also where the statutory salary ceiling was increased to INR 15,000 from INR 6,500.

With effect from 1 September 2014, if your monthly pay exceeds INR 15,000, you will not be eligible to become a member of the Pension Scheme (unless you are an existing member). In this case, your entire share of contribution as well as that of employer's will be allocated to the Provident Fund Scheme.If you are an existing member of the Pension Scheme, contribution to the Pension Scheme will be on INR 15,000 per month.

The increase in statutory salary ceiling, though will increase the monthly contributions, may impact your monthly take home salary. That is, you may have to adjust to a lower monthly in-hand.
Here is a look at some hypothetical examples:

Tanu is a voluntary member of the Provident Fund and Pension Scheme with a monthly pay of INR 12,000. Earlier, she and her employer contributed to these schemes only on INR 6,500 as the option to contribute on a higher pay was not availed. But now she and her employer would have to mandatorily contribute on a higher amount i.e. INR 12,000. Although, this would lead to an increased savings in the Provident Fund Scheme, it would also lower her monthly take home salary by both the employee's and employer's share of additional contribution - where the employer's contribution forms part of CTC of the employee. Her monthly take home salary would fall by INR 1,320 (24% of (12,000 - 6,500)).

Provident Fund Authorities have clarified through circular dated 18 March 2014 that the employers' contribution may also form part of CTC of the employee. It is thus not wrong if the employer is showing employer's share of Provident Fund contribution as a part of CTC of the employee.
The Authorities have also clarified that the employer will not be permitted to segregate the CTC into various components so as to bring the amount of monthly pay on which contributions is payable below the statutory salary ceiling.

Thus, if Tanu's gross salary / CTC exceeds INR 15,000 per month, the Authorities may require both Tanu and her employer to make monthly contribution on minimum INR 15,000.

Another example - Ritika is not an existing member and earns monthly pay of INR 12,000. Earlier, she did not contribute to the Provident Fund Scheme as it was optional for her to become the member. However, after the change in statutory salary ceiling, she has to mandatorily become a member of the Provident Fund and Pension Scheme. Also, she would face a monthly shrinkage in her take home salary by INR 2,880 (24% of 12,000).

Apoorva is an existing member and earns monthly pay of INR 20,000. Earlier, she and her employer contributed to the Provident Fund Scheme on INR 6,500 only - she did not opt to pay on a higher salary. But now she and her employer would have to mandatorily contribute on a higher amount i.e. INR 15,000 atleast. This would reduce her monthly take home by INR 2,040 (24% of (15,000 - 6,500).

The Government has also fixed monthly pension benefit for Financial Year 2014-15 at INR 1,000 and increased the lump-sum benefit available on death of employee by 20 percent.

Parting with current spending for the future benefit has always been a classic give-and-take situation.

n the backdrop of the importance of savings, the Government has made changes in social security regime through a slew of measures. On the whole, in spite of a possible constraint on your take home salary, the revision of statutory salary ceiling to INR 15,000 may do wonders for your savings.

By Puneet Gupta, Senior Tax Professionals, EY ET 140909

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