India: Why are EPF contributions calculated on the full basic salary?
Anubhav Chattoraj, Founder & Director · 16 August 2026 · 4 min read
Background
On 29 June 2026, India’s Central Government introduced the Employees’ Provident Fund (EPF) Scheme, 2026, replacing the earlier EPF Scheme, 1952. Both the 1952 and the 2026 schemes are defined-contribution schemes where the accumulated contributions can be withdrawn as a lump sum on superannuation.
Both the 1952 and the 2026 schemes have a ₹15,000 per-month cap (the wage ceiling) on salaries with an option to ignore it and calculate contributions on the full salary instead.
Large employers generally ignore the ceiling and calculate contributions on the full basic salary, with the aim of compensating employees in a more tax-efficient way. This article explains why.
Salary for EPF contribution
What follows is a basic summary of the EPF Scheme provisions for the salary on which EPF contributions are calculated.
| Provision | Reference: 2026 Scheme | Reference: 1952 Scheme |
|---|---|---|
| Employees’ contribution is subject to a wage ceiling limit (currently ₹15,000 per month) | Para 18(3) | Para 26A(2) |
| Employer’s contribution is equal to employee’s contribution | Para 18(2) | Para 29(2) |
| Employer & employee can contribute on wages above the wage ceiling on joint request to EPFO | Para 9(4) | Para 26(6) |
| VPF (Voluntary PF): Employees can choose to contribute more than they are required to. Employers are not required to (but are permitted to) match these contributions. | Paras 19(1) & 19(2) | Proviso to para 29(2) |
| VPF contributions can be reduced or stopped at any time by the employer or employee | Para 19(4) | NA |
There is no substantive change in these provisions between the 1952 and 2026 schemes, apart from clarifications regarding VPF.
As an aside, there are media reports that the wage ceiling may be increased to ₹25,000 per month with effect from 1 April 2027.1
Why do employers calculate EPF contribution on uncapped salary?
Most large employers opt to calculate EPF contributions on the full salary instead of the capped salary of ₹15,000 per month. Both the joint-request route and the VPF route above enable them to do so.
This is intended to be a more tax-efficient way of remunerating their employees. For an explanation, consider the taxable income of an employee with a 20 lakh annual CTC:
| Item | With salary capping | Without salary capping | Notes |
|---|---|---|---|
| Basic salary | 10,00,000 | 10,00,000 | |
| Other salary components | 9,78,400 | 8,80,000 | Balancing item |
| Employer PF contribution | 21,600 | 1,20,000 | 12% of (15,000*12) or full basic, as applicable |
| Total CTC | 20,00,000 | 20,00,000 | |
| Taxable income (New regime) | 19,78,400 | 18,80,000 | Basic + other components. Employer PF contribution is not considered taxable income 2 |
| Employee PF contribution | 21,600 | 1,20,000 | Equal to employer contribution |
| Taxable income (Old regime) | 19,56,800 | 17,60,000 | New regime taxable income minus employee PF contribution, deductible up to a ₹1,50,000 cap. |
(Ignoring standard deduction and other deductions apart from PF.)
As can be seen, a higher PF contribution leads to a lower taxable income under both the new and old tax regimes.
Should employers change their PF contribution policy?
Individual employees may have different preferences for tax saving weighed against in-hand payouts.
The EPF scheme provisions mandate deductions up to the wage ceiling, with higher deductions being expressly subject to employees’ consent (along with employers’ consent).
At present, the employees of many large organizations are subject to PF deductions on their full basic salary, without having provided informed consent to the same.
With the 2026 scheme’s clarifications on VPF, employers can instead choose to adopt a consent-based approach: deductions beyond the statutory minimum can be authorized by employees as VPF, with employers choosing to make matching contributions.
Footnotes
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Moneycontrol: Department of expenditure approves raising EPF wage ceiling to Rs 25,000 a month ↩
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Subject to some guardrails: Employer PF contribution is not taxable in the employee’s hands, provided aggregate employer contributions to recognised PF, NPS and approved superannuation funds do not exceed ₹7.5 lakh in the tax year. ↩
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