EPF contribution at 10% likely to push up your take home by only 1-2%

By Vishal Grover

The minimize in Employees’ Provident Fund (EPF) contribution from 12% to 10% of the month-to-month PF pay by each employer and worker introduced by the federal government has raised a query within the minds of the workers: Will the minimize impression the contribution made to the Employee’ Pension Scheme (EPS)? By how a lot will my take home pay enhance and the way will it impression my tax outgo.

The Employees Provident Fund Organization (EPFO) has launched a set of FAQs addressing the potential points round its implementation. The key clarifications made within the FAQ doc embrace:

  • The non permanent discount in contribution fee is not going to impression the Employees’ Pension Scheme (EPS), subsequently employers would have to proceed contributing 8.33% of the relevant wages capped at Rs 15000 p.m. in direction of the EPS plan.
  • The minimal fee of PF contribution can be 10% of relevant wages for each employer and worker for the months of May, June and July 2020.
  • The decreased fee is relevant to all personal sector institutions below EPF & MP Act. Exempted institutions which self-manage the PF can even get the advantage of decreased contribution.
  • The decreased fee of 10% is the minimal fee through the Three months interval. Both employer and worker might contribute at the usual fee of 12% in the event that they select to accomplish that.
  • The FAQ doc additionally makes a reference to the Cost to Company (CTC) mannequin adopted in India whereby employers embrace the 12% PF contribution as a part of the CTC supply made to staff at the time of becoming a member of. As per the FAQ, after this discount, “employees get more directly from employer as employer’s contribution is reduced”. This implies that there’s an expectation that employers adopting the CTC mannequin would move on the decreased 2% PF contribution to staff as a part of wage for these Three months.

It is evident from the FAQs launched by the EPFO, that if each employer and worker contribute at the speed of 10% to the EPF account, even then contribution to EPS account will stay the identical topic to most of Rs. 1250 monthly.

As per the EPF scheme guidelines, 8.33% of the employer’s contribution goes to the EPS topic to most of Rs 1250 monthly. Therefore, even when employer contributes at 10% of the month-to-month pay for May, June and July 2020, the EPS contribution will stay 8.33% and steadiness 1.67% will go to EPF account.

While the two% discount in contribution is critical, the features could also be restricted for employers as majority of organizations observe the Cost to Company mannequin in India. Employers might subsequently have to redirect the decreased PF contribution of two% into staff’ wage for the month of May, June and July.

Where such redirection of the employer’s PF contribution occurs, the workers would get increased cash-in-hand wage equal to 4% of fundamental wages (2% every from employer’s and worker’s facet) which ought to assist in the present disaster the place pay cuts have grow to be frequent. However right here once more staff might not really feel a fabric distinction.

This is as a result of staff would have to pay earnings tax as per their respective tax slab charges on the employer’s 2% which will get added to the worker’s wage. Similarly, the worker’s 2% which will get added to wage can even be topic to Income tax which presently would have been exempt from tax as the worker’s contribution is a part of the earnings tax part 80C the place tax-deductible investments are made. Here the lack of tax profit can be felt by those that have been really utilizing it.

For instance, excessive earners who exceeded their Section 80C restrict through increased worker PF contributions and different tax saving avenues is not going to be affected tax-wise by the switch of two% of worker contribution from EPF to wage. However, for these staff who have been claiming the tax advantage of their 2% contribution to EPF, the increase in salary would in impact be taxable and these impacted staff might have to enhance their investments in different tax saving devices below 80C like ELSS, Insurance premiums or PPF.

In abstract, an worker below the tax bracket of 30% may even see precise wage getting elevated by roughly 2.8% only after tax. Additionally, for majority of organizations, fundamental wages represent 30% to 50% of gross pay, subsequently the precise wage in hand enhance might only be roughly 1% of gross pay for workers within the highest tax bracket. Not an enormous distinction if the worker has undergone a double digit pay minimize.

Scenario I II
Income Tax Rate 30% 20%
Basic Pay to Gross Salary Ratio 40% 50%
Gross wage monthly 100,000 50,000
Basic Salary monthly 40,000 25,000
Standard PF Employer Contribution@12% – A 4,800 3,000
Standard PF Employee Contribution@12% – B 4,800 3,000
Standard PF Employer Contribution@10% – C 4,000 2,500
Standard PF Employee Contribution@10% – D 4,000 2,500
Increase in Salary (pre tax) = (A + B) – (C+D) 1,600 1,000
Increase in Salary (submit tax as per slab fee) 1,120 800
Increase in Gross wage after earnings tax 1.12% 1.60%

For simplicity, contribution to EPS has been ignored and tax charges as per previous regime have been used

The modification may additionally enhance the executive duties for the employers within the subsequent month. As the discount is elective, employers might have to attain to their staff and search their affirmation on whether or not they need to go for the decreased worker contribution fee of 10% or keep it at 12% of Basic for the subsequent Three months.

Looking at all of the above implications and the truth that majority of employers observe the CTC mannequin, each employers and staff may be better-off not altering something.

Employees ought to notice the truth that the aim of Provident Fund is to guarantee sufficient retirement financial savings sooner or later and subsequently shouldn’t go for a decrease contribution contemplating the web impression would only be round 1% enhance of their gross wage for the three months. At the identical time employers may additionally favor to keep away from lot of operational work the place they might have to replace payroll techniques quickly. Employers ought to guarantee clear communications are made to staff on the implications of decrease contributions which can encourage staff to not change something.

It must also be famous that the decreased contribution fee doesn’t apply to institutions that are availing advantages below PMGKY scheme the place the federal government is contributing in direction of the Provident Fund

(The author is Practice Leader, Retirement Solutions, Aon India)

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