FM’s stimulus: Lower EPF deduction to put more money in the hands of employees

From June, your take-home salary may go up slightly, until August. Finance Minister Nirmala Sitharaman announced a reduction in the statutory employees’ provident fund (EPF) contribution from the mandatory 12 per cent to 10 per cent. This will be applicable to all establishments covered by the Employees’ Provident Fund Organisation (EPFO) for the next three months.

Lower deductions

The employer will be allowed to deduct 10 per cent from your basic salary and contribute an equivalent amount to your EPF account as employers’ contribution, instead of 12 per cent earlier. Central public sector enterprises and state public sector units, however, will continue to contribute 12 per cent of the basic salary to its employees’ provident fund accounts.

“The move by the government 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,” said Saraswathi Kasturirangan, Partner, Deloitte India.  This means sizeable savings, particularly for companies with expat employees whose employee contribution, too, is borne by the former, depending on the terms of the employment contract.

This move will provide liquidity of Rs 6,750 crore to employers and employees over three months, though, on the flipside, it also means such employees’ retirement savings will take a slight hit.

Deploying additional cashflows

“If you do not have any immediate need for this minor additional cashflow, you can look at increasing your voluntary provident fund (VPF) contribution. Alternatively, you can also start systematic investment plans (SIP) in equity funds,” said Vishal Dhawan, Founder, Plan Ahead Wealth Advisors. VPF contributions are entitled to the same rate of interest as statutory EPF, besides deductions under section 80C of the Income Tax Act, up to Rs 1.5 lakh.

It will benefit 6.5 lakh establishments and 4.3 crore employees, Sitharaman said at a press conference.

Moreover, the central government has also decided to extend the government funding of the 12 per cent employee as well as employer EPF contributions by another three months – that is, June, July and August. This is expected to provide liquidity of Rs 2,500 crore to 3.67 lakh firms and 72.22 lakh employees. In March, the finance minister had announced that the government will pay the employer-employee PF contribution for establishments with up to 100 employees, and 90 percent of whom earn under Rs 15,000 per month.