Major change in Provident Fund rule! EPF contribution rate cut from 12 pct to 10 pct

The government has announced several measures for employees on Wednesday evening giving them some relief during the coronavirus crisis. Probably, the most important announcement came in the form of benefits announced for members of Employees' Provident Fund (EPF). The finance minister informed that those earning a basic salary of more than Rs 15,000 a month can opt to pay 10 per cent instead of the mandatory 12 per cent contribution towards PF for the next 3 months.

Currently, all the employees are required to pay 12 per cent of the monthly pay towards provident fund, with an option to enhance it to up to 100 per cent of the basic pay. The contribution above the designated 12 per cent is called voluntary provident fund (VPF). 

"Provident contribution is calculated at 12% of basic wages + dearness allowance + retaining allowance. The announcement on provident fund reliefs is a positive one. The percentage of PF contribution has been reduced to 10%,” Pooja Ramchandani, Partner, Shardul Amarchand Mangaldas & Co said, while explaining that prior to this, the 10 per cent rate was applicable to establishments with less than 20 employees, sick industries,  establishments where losses exceed net worth, jute, beedi, brick, coir and gum industries. 

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“This change will be beneficial for both employer and employees. The decrease in the rate of contribution will reduce employer's financial outlay and conserve cash flow to some extent. For the employees it will increase their take home salary enabling liquidity in their hands - however, this could be coupled with a tax impact for the employees as this additional take home will be deemed to be income. Further the additional 3 months extension of contribution by the government for small industries is an added bolster to weather the storm,” she said.

The measures will boost the employee sentiment by increasing the take-home salary. 

“Additional packages announced were EPF contribution package of Rs.2,500 crores towards employer and employee contribution support till August 2020 and to increase the take-home salary (for those not covered in PPF and except PSU) the statutory PF contribution is being brought down to 10 percent for 3 months. These packages will boost the mood of employees and ease the cash burden for MSME’s,” Kapil Rana, Founder & Chairman, HostBooks Limited said.

“The move by the government to reduce the 12% PF contribution to 10% will help increase the take home pay of employees. It will also reduce the  cost to the employers, especially for international workers where the company picks up the cost,” Saraswathi Kasturirangan, Partner, Deloitte India said.