What does reduced EPF contribution mean for employees and how can it benefit them?

In a big relief, the government announced reduction of Employees’ Provident Fund (EPF) contribution for both employers and employees to 10 percent of basic wages for next three months – June, July and August. This move, government said, will increase cash in the hands of employees. This measure was a part of the Rs 20 lakh crore economic package announced by the government.

Finance experts say that the cut in EPF contribution rate will increase the take-home salary of an employee. But there’s a rider, which should be seen.

EPF acts as a saving tool for employees. Currently, the employees contribute 12 percent of their salaries, and an equal amount is contributed by the employers in an EPF account.

The reduction of 10 percent ideally means employee's portion of 2 percent will be paid out as salary to all employees in the next three months. Hence, employees will get slightly higher payout.

However, a very clear perspective is still awaited on what will be done with the employers’ contribution of 2 percent. If that is also added to the savings of employees’ it’s a gain and if not that brings a net loss for the employee.

It’s also noteworthy to see that the announcement is meant only for private sector employers and employees. Public sector employees and employers will still continue to pay 12 percent.

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The decision is however expected to increase cost-savings for startups at a time when the entire country is looming under economic mayhem in view of the coronavirus outbreak. The government has been announcing several relief measures in order to arrest the economic fallout.

The government anticipates that EPF relief decision will provide support to around 6.5 lakh companies and give Rs 6,750 crore worth of liquidity over the next three months. At the same time, about 4.3 crore employees will be able to get 2 percent more take-home salaries. 

The statute, however, does not cast an obligation on the employer to pay the remaining 2 percent to the employee as salary. Such payment, if at all, will depend on the construct of the employment agreement. A clearance is still awaited on this.

Experts also say that the decision will increase the take-home salary, but at the same time it will reduce investments under section 80(C) for the financial year 2020-21. This means taxpayers will end up paying more taxes with the reduced EPF rate of 10 percent. EPF is eligible for deduction under Section 80C with a maximum cap of Rs 1,50,000.

With the reduction in EPF rates, some taxpayers may have to relook at deductions they want to claim (Section 80C).

The lower contribution may also impact the financials of some people. Those who have stable income at present with regular contribution of 24 percent may see some disruption. EPF anyways works on the formula of compounding and if left entirely can give huge benefits in future. It includes pension component. Employees can get pension after retirement based on the amount accumulated.

Reduction in EPF contribution means less saving for the salaried. However, there will be a short-term growth of in-hand salary.

Employees’ who think that this relief will disrupt their savings should opt for other investment avenues such as Voluntary Provident Fund or Public Provident Fund.

(By Yogita Tulsiani, M.D ,iXceed Solutions (Global Tech Recruitment provider)