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Ramalingam

Ramalingam Kalirajan  |8204 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jun 03, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more
Dhanashree Question by Dhanashree on May 29, 2024Hindi
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if my basic salary is less than Rs. 15,000.00/ month then is it right to deduct the employer contribution Rs. 1,800.00/-

Ans: Understanding Employer Contribution to Provident Fund for Basic Salary Below Rs 15,000
When your basic salary is less than Rs 15,000 per month, there are specific guidelines for employer contributions to the Provident Fund (PF). Let’s delve into the details to understand whether it is correct to deduct Rs 1,800 as the employer’s contribution.

Basics of Provident Fund Contributions
The Provident Fund is a social security scheme for employees. It ensures savings for retirement. Both the employee and employer contribute to the PF. The contributions are usually a percentage of the employee's basic salary plus dearness allowance (DA).

Contribution Rates
Typically, the employee contributes 12% of the basic salary plus DA to the PF. The employer also contributes 12%, but this is split into two parts: 8.33% goes to the Employee Pension Scheme (EPS) and the remaining 3.67% goes to the Employee Provident Fund (EPF).

Specific Case: Basic Salary Below Rs 15,000
If your basic salary is below Rs 15,000, the employer’s contribution to the PF follows a specific structure:

Employee Contribution: 12% of basic salary + DA
Employer Contribution: 12% of basic salary + DA, split between EPF and EPS
Maximum Limit on Employer’s EPS Contribution
For EPS, the employer’s contribution is capped. The maximum salary considered for EPS contribution is Rs 15,000. Thus, 8.33% of Rs 15,000 (which is Rs 1,250) is contributed to EPS. Any amount above this goes to the EPF.

Calculation Example
Let’s assume your basic salary is Rs 12,000 per month.

Employee Contribution: 12% of Rs 12,000 = Rs 1,440
Employer Contribution:
EPS: 8.33% of Rs 12,000 = Rs 999.60 (capped at Rs 1,250 if basic salary is Rs 15,000)
EPF: 3.67% of Rs 12,000 = Rs 440.40
Scenario: Rs 1,800 Employer Contribution
If the employer is contributing Rs 1,800 when your basic salary is less than Rs 15,000, it’s essential to check the distribution between EPS and EPF. It could mean higher contributions towards EPF, which is allowed.

Is Rs 1,800 Deduction Correct?
The correctness depends on how the Rs 1,800 is split:

EPS Contribution: Should be a maximum of 8.33% of Rs 15,000 or Rs 1,250.
EPF Contribution: The remaining amount after deducting the EPS portion from the total 12% of basic salary.
Empathising with Your Concern
Understanding these deductions can be confusing. It’s important to ensure clarity on how your contributions are calculated. Checking your pay slip and the contribution details can help.

Importance of Accurate Deductions
Accurate PF contributions ensure sufficient retirement savings. It also ensures compliance with legal requirements. Any discrepancies can affect your savings and benefits.

Reviewing Your Payslip
Check Basic Salary: Ensure the basic salary mentioned is accurate.
Review Deductions: Verify the PF deductions.
Seek Clarification: If there are discrepancies, discuss with your HR department.
Benefits of PF Contributions
Tax Savings: Both employee and employer contributions qualify for tax benefits.
Retirement Savings: Ensures a corpus for post-retirement life.
Pension: Part of the contribution goes towards pension, providing regular income after retirement.
Analytical Perspective
From an analytical perspective, understanding the PF structure helps in financial planning. Knowing the exact deductions and contributions clarifies your take-home salary and retirement benefits.

Assessment of Employer Contributions
Regularly assessing employer contributions ensures that they align with statutory requirements. This assessment also helps in identifying any errors early, ensuring corrective measures.

Consulting a Certified Financial Planner
A Certified Financial Planner (CFP) can provide detailed insights into your PF contributions. They can also help you understand the impact on your overall financial planning and retirement savings.

Conclusion
To conclude, if your basic salary is less than Rs 15,000, the employer's contribution should align with the statutory guidelines. Rs 1,800 as an employer contribution can be correct, depending on the split between EPS and EPF. Regular review and consultation with a CFP can ensure accurate contributions and optimal retirement savings.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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Ramalingam

Ramalingam Kalirajan  |8204 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Mar 10, 2025

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Sir, My sons salary is 1.5 lakhs per month but the employer is deducting EPF subscription only on 15000 and similarly the Employers contribution is also made on 15000. Is it permissible uner the Act ? Is it not mandatory to increase the EPF subsription and Employers contribution on his basic pay which is higher than 15000?
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

..Read more

Latest Questions
Ramalingam

Ramalingam Kalirajan  |8204 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Apr 08, 2025

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I am 51 years want to park 10 L recieved from LIC. I have Nippon liquid and Axis Short term funds. Where should I keep this,in these debt fund or some other for max return and least risk . Or some balanced advantage funds?
Ans: Since you're 51 years old and the Rs. 10L is from an LIC maturity, I’ll assess this from a 360-degree perspective with low risk and reasonable return focus.

Let us structure this under simple and clear headings:

Understand the Nature of the Rs. 10L
This is a one-time amount, not a regular income.

So, capital protection is important.

Also, some growth is expected, but not with high risk.

Evaluate Your Existing Funds
Nippon Liquid Fund is very low risk.

Good for short-term parking, like few months.

Returns are around 5.5% to 6% yearly.

You can use it if you need money anytime soon.

Axis Short Term Fund is slightly better return.

Slightly higher risk than liquid fund, but still low.

Returns can be around 6% to 7% yearly.

Suitable if you are okay to stay invested for 2-3 years.

Should You Switch to a Balanced Advantage Fund?
These funds invest in both equity and debt.

They adjust the mix based on market conditions.

They give better return than debt if held for 3-5 years.

But, they carry moderate market risk.

Return range can be 8% to 10% per annum.

Not guaranteed, but historically stable.

Suitable if your risk tolerance is moderate.

Also, you must stay invested for at least 3 years.

What You Can Do Now (Allocation Suggestion)
Here is a simple, low-risk and flexible suggestion:

Rs. 2L in Nippon Liquid Fund: For immediate needs.

Rs. 4L in Axis Short Term Fund: Safe with better return.

Rs. 4L in Balanced Advantage Fund (via MFD with CFP): For better growth.

Choose an actively managed regular plan.

Avoid direct plan. They lack support and monitoring.

Regular plans offer advisor support and rebalancing guidance.

Why Not Direct Plan?
Direct plans look cheaper.

But they don’t guide you during market falls.

Many investors panic and exit early.

This leads to poor returns.

With MFD + CFP support, you stay invested longer.

Long-term behaviour matters more than cost.

Why Not Index Funds?
Index funds blindly follow the market.

No protection during market fall.

No fund manager to adjust strategy.

Active large-cap or balanced funds adapt better.

At your age, protection is more important than chasing index.

Important Tax Point
Debt funds and balanced advantage funds are taxed as per income tax slab.

If you hold for 3+ years, tax is less due to indexation benefit in earlier rules.

But now, for debt funds, tax is same as your slab.

So, choose based on your tax slab also.

But do not let tax alone decide. Safety is first.

Final Insights
Your Rs. 10L should grow slowly and stay safe.

Split into 3 buckets: short-term, mid-term, and medium-risk.

Liquid fund for liquidity.

Short-term debt for capital stability.

Balanced advantage for gentle growth.

This mix gives you flexibility, return and low risk.

Please review once a year with a Certified Financial Planner.

He/she will help you shift the mix if your goal or market changes.

No need to chase high returns. Protect capital, grow steadily.

You already took a right step by asking before investing.

That clarity helps avoid mistakes.

With this structure, your money can stay safe and still grow.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

...Read more

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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