In a bid to ease liquidity situation of both employees and employer amid the pandemic when lockdown has disrupted life by a great deal and brought businesses to virtually a standstill, the government as part of its Covid 19 relief package allowed reduction in EPF contribution to 10% from currently 12% of basic salary and dearness allowance for 3 months starting May.
But soon after the rule of lower contribution to EPF account was notified, the retirement fund body EPFO released frequently asked questions or FAQs that aimed at providing clarity on the statutory reduction in contribution rate to EPF account by both the employer and employee.
Below are listed some of the concern areas that you as salaried class individual may be seeking clarity on:
1. Lower contribution not mandatory for both employers and employees:
There was a news piece that said employees' basis their discretion can even contribute a higher percentage than 10% recommended for EPF contribution. Nonetheless, employers need not match higher contribution. But as per the FAQs, this lower contribution rate is not mandatory for both employers and employees.
2. Employers going by CTC Model, need to pay 2% to their employee if opting for lower contribution rate of 10%:
In a case if employer remunerates his or her employee basis the cost to company model and switches to lower contribution rate of 10% then in such a case the employer needs to compensate his or her employee by paying a sum equivalent to 2% contribution.
3. Employee and employer can opt for different contributions to EPF account, 10% being the minimum by each :
The EPF corpus is created over tenure for meeting one's financial needs during the time when one is no longer working or has retired from his working life. And now with the reduced contribution rate to EPF account by both the employer and employee, which is indeed not mandatory i.e. employee can still contribute a higher percentage than 10% say 12% and employer can continue to contribute 10% there can a number of combinations of such contribution to EPF account by the employee and employer.
The FAQ by the EPFO said, "The reduced rate of contribution (10%) is the minimum rate of contribution during the period of the package. The employer and employee or both can contribute at a higher rate also."
"This means that employers and employees can opt for various combinations such as both employer and employee can opt for a lower contribution of 10% or both can continue with 12% contribution or employer can opt for 10% contribution while an employee can continue to contribute 12% or the employer can contribute 12% while the employee can opt for a lower contribution of 10%. The change in in-hand salary of the employee will depend on the combination opted for," said Saraswathi Kasturirangan, Partner at Deloitte India.
4. Impact on CTC of employee:
The lower rate of contribution to the employee's EPF account by the employer will not impact his or her take-home pay or in-hand salary, nonetheless being a part of the CTC, lower contribution rate by the employer will certainly reduce employee's CTC. And thus EPFO has clarified that in a case when employer are opting for lower contribution rate of 10% to subscriber's EPF account, they would need to compensate their employees with 2% of contribution amount.
Herein what needs to be noted by the employee is that in a case if they receive the 2% PF contribution of the employer then it would be taxable in their hands.
Say if your employer on your basic salary and DA of Rs. 10000 earlier contributed 12% i.e. Rs. 1200 but now opts for Rs. 1000 contribution at the rate of 10% then it will mean a loss of Rs. 200 *3 i.e. Rs. 600 in your CTC, which shall be now compensated to you by your employer.
5. Impact on pension:
Notably of the 12% employer's contribution, 8.33% of wages subject to a maximum of Rs. 15000 is transferred towards employees pension scheme. As per EPFO clarification, "The reduced rate of EPF contributions to 10% will not reduce the pension contributions or benefits".