12,080.85-45.05
Stock Analysis, IPO, Mutual Funds, Bonds & More

Govt plans to cut EPF contribution rate, take home pay would rise: Will employees benefit?

Currently, employee contribution to PF is 12 percent, and an equal percentage is contributed by the employer. However, the draft EPF Bill proposes to reduce the EPF rate of contribution to 10 percent, both by the employee and the employer.

ET CONTRIBUTORS|
Last Updated: Jan 24, 2020, 09.48 AM IST
0Comments
Getty Images
salaey
PF contributions are entitled for income tax deduction under section 80C.
Tax Calculator
By Homi Mistry

The Government of India proposes to bring in radical changes in the Employees' Provident Fund (EPF) regulations, by consolidating the various laws relating to social security with the introduction of the Code on Social Security, 2019. One of the key changes proposed in the Social Security Bill with regard to employees' PF is the reduction in PF contribution from 12 percent to 10 percent.

Currently, employee contribution to PF is 12 percent, and an equal percentage is contributed by the employer. While EPF rules allow the employee to contribute up to 100 per cent of one's basic pay, the employer need not match the enhanced rate of contribution.

However, the draft EPF Bill proposes to reduce the EPF rate of contribution to 10 percent, both by the employee and the employer. Further, it also mentions that the government may notify a specific rate of contribution and the period for which such rate will apply for any class of employee.

Impact of the move
1. Take home pay would increase
If EPF contribution rate is reduced from 12 percent to 10 percent, the net monthly income for individuals will increase, thereby raising the take-home pay. The rationale for allowing lower employee PF contribution could be to give employees a higher take-home pay leaving them with more flexibility to plan their personal finances, such as paying a higher EMI for home loan, investments, other purchases, etc. Thus, this could lead to increased spending which may come as a shot in the arm for the economy.

2. Retirement corpus would decrease significantly
As the PF corpus accumulates over the years and fetches an attractive interest rate, the effect of compounding gives a good return on the corpus at the time of retirement. However, the decline in the investments could lead to significant reduction in the PF corpus.

While the overall reduction proposed is only 4 percent (2 percent for employer and 2 percent for employee), the overall impact of the reduction over a period of time could be quite significant. Thus, individuals who have planned a certain retiral corpus may need to invest their entire savings either through NPS, ULIP, SIPs, etc. to meet their retirement goals.

3. Cost-to-Company (CTC) may have to be restructured
Typically, employers agree on a CTC with the employees while deciding on the remuneration. Thus, any reduction in the PF contribution will necessitate the need to increase the compensation payable to the employees. Employers may have to re-structure the existing package or they may pay the additional amount in the form of an allowance which may have tax consequences.

4. Income tax benefit may decrease
PF contributions are entitled for income tax deduction under section 80C. The maximum amount of deduction that can be claimed under this section is Rs 1.5 lakh. Reducing the percentage of the PF contribution may result in higher tax pay out if no other tax-saving investments are made.

For instance, if annual contribution towards PF falls by Rs 10,800, then for someone paying 31.2 percent tax, the excess tax of Rs 3,370 will have to be borne by the employee, unless there are other eligible (under section 80C or similar exemption-related sections) investments made.

Currently the Social Security Code has been referred to a Standing Committee of the Parliament and one may need to examine the Standing Committee Report and the changes made thereafter, to know what finally happens in the matter.

(The author is a Partner with Deloitte India)
Click here for all the information and analysis you need for tax-saving this financial year
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

Also Read

When can you prematurely withdraw from EPF?

When does your EPF become taxable?

Income tax benefits on EPF contributions: New vs existing tax regime

Budget 2020 may tax employer's excess contribution to EPF, NPS twice

How to transfer your EPF account online

Comments
Add Your Comments
Commenting feature is disabled in your country/region.

Other useful Links


Copyright © 2020 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service