Weplan to recruit a few apprentice officers in our organization for a period of one year for a fixed stipend. Depending upon their performance, they may be absorbed as regular employees. Will we have to deduct provident fund from the fixed stipend to be paid to them? Varsha Godbole

Ans: Under the EPFO Act and Scheme, it’s not permissible for an employee to contribute 12% on Rs. 15,000 while earning a basic salary of Rs. 20,000, even if he/she is excluded from the PF Act.

Kindly find the reasons for the same:-

• Mandatory Contribution: The EPFO Act mandates that employees covered under the Act contribute 12% of their basic salary (up to Rs. 15,000) towards the PF. This applies even to those excluded from certain provisions.

•No Selective Contribution: The Act doesn't allow employees to selectively contribute on a lower salary amount. They must contribute based on their actual basic salary.

• Wage Ceiling: The Rs. 15,000 wage ceiling applies only to the employer's contribution, not the employee's. Employees must contribute 12% of their entire basic salary, even if it exceeds Rs. 15,000.

For further clarity on specific exclusions and contribution rules, consult with the EPFO directly via email.

Ans: Your son earns Rs 1.5 lakh per month, but EPF deductions are only on Rs 15,000. This is a common concern among salaried individuals. Let’s assess whether this is permissible and what options are available.

 

EPF Contribution Rules Under the Law
The Employees’ Provident Fund (EPF) is governed by the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952.

As per the EPF rules, it is mandatory for employees earning up to Rs 15,000 per month to contribute 12% of their basic salary plus dearness allowance (DA) towards EPF.

Employers must match this contribution with their own 12%, but part of it (8.33%) goes to the Employees’ Pension Scheme (EPS).

For employees earning more than Rs 15,000 per month, EPF contributions above Rs 15,000 are not mandatory. Employers are allowed to restrict contributions to Rs 15,000 unless both employer and employee voluntarily agree to contribute more.

 

Is the Employer’s Practice Legal?
Since your son earns Rs 1.5 lakh per month, his employer is legally allowed to cap the EPF contribution at Rs 15,000.

The law does not mandate contributions on the full basic pay if it exceeds Rs 15,000.

If your son wants a higher EPF contribution, he can opt for Voluntary Provident Fund (VPF), but the employer is not obliged to match it.

 

Should Your Son Increase His EPF Contribution?
EPF is a safe and tax-efficient retirement savings option. However, it has limitations when it comes to wealth creation. Let’s assess the pros and cons of increasing EPF contributions.

 

Advantages of Increasing EPF Contribution
Safe and Guaranteed Returns – EPF provides fixed returns declared by the government.

Tax-Free Interest – Interest earned on EPF is tax-free up to Rs 2.5 lakh annual contribution.

Forced Savings for Retirement – Higher contributions ensure disciplined long-term savings.

 

Disadvantages of Increasing EPF Contribution
Limited Growth Potential – The return on EPF is lower than actively managed equity mutual funds.

Liquidity Constraints – Funds in EPF are locked until retirement, with limited withdrawal options.

Employer’s Contribution Won’t Increase – Even if your son contributes more via VPF, the employer’s share remains capped at 12% of Rs 15,000.

 

Alternative Investment Options for Better Wealth Creation
If your son wants higher returns, he should consider other investment options instead of increasing his EPF contribution.

 

1. Actively Managed Mutual Funds
Actively managed mutual funds have higher return potential than EPF over the long term.

They are professionally managed and provide exposure to high-growth sectors.

A mix of large-cap, mid-cap, and flexi-cap funds can create a balanced portfolio.

 

2. Voluntary Provident Fund (VPF) – A Safe Option
If he prefers safe investments, he can opt for VPF, which offers EPF-like returns but without an employer match.

It is suitable if he wants fixed returns with tax benefits.

 

3. Public Provident Fund (PPF) for Long-Term Safety
PPF is a great option for long-term tax-free compounding.

The investment is locked for 15 years, ensuring retirement security.

 

4. Diversified Portfolio for Growth
Instead of putting all savings in EPF, he should allocate funds across different asset classes.

A combination of EPF, mutual funds, and fixed-income products will provide both safety and growth.

 

What Should Your Son Do Next?
Your son should evaluate his long-term financial goals before deciding on EPF contributions.

 

If He Prefers Safety:
Keep EPF contributions as they are.

Increase investment in VPF or PPF.

 

If He Wants Higher Returns:
Keep EPF limited to Rs 15,000 cap.

Invest in actively managed mutual funds for better wealth creation.

Consider a mix of equity and debt investments based on risk appetite.

 

Final Insights
Your son’s employer is following the law correctly by restricting EPF contributions to Rs 15,000. While increasing EPF contributions can provide stability, it limits growth potential and liquidity. Instead, a diversified approach with actively managed mutual funds and fixed-income options can offer better long-term wealth creation.

Encourage your son to review his financial goals and create an investment strategy that balances safety and returns.

 

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment