New EPF Rule: How Will Your Salary Change From May?

To address the liquidity concerns, the Finance Minister Nirmala Sitharaman as part of her Covid 19 bail-out package announced a cut in EPF contribution rate to 10% from 12% for the next 3 months beginning May for both employees as well as employers covered under the EPFO. Nonetheless central and state public sector enterprises shall not be part of this ruling and will continue to contribute 12% of basic wages plus DA to EPF account of subscribers.

Further, to this there has come a word from the ministry of labour which suggests that employees basis their discretion can even contribute a higher percentage than the statutory rate of 10% to their EPF account, but employer need not match the higher contributions.

Now as the EPF rule becomes applicable to the entire private workforce, here is detailed how the change will impact your overall salary from May which you will get paid in June.

Interestingly, for employees it may mean reduced CTC or cost to company (if the CTC or salary package comprises employer's contribution to the EPF) and increased take home pay for the month of May, June and July.

Until now, both the employer and employee subject to some conditions were mandatorily required to contribute 12% each of basic salary and DA or dearness allowance i.e. in total 24% to EPF subscriber's account.

What Changes after the EPF Contribution Rate is cut to 10% for both Employer and Employee?

Now as there will be a total 20% contribution i.e. 10% each by the employee and employer to the EPF account, the 2% reduced contribution by the employee shall be paid out as increased take home pay to the employee. But the savings to the employer by way of reduced contribution rate to the EPF may or may not be given to the employee. So, this means a net loss to the employee to that extent.

Say for instance, in a case when your basic salary and DA is Rs. 10000, now after the new rules set in your employer and employee would contribute 10% each i.e. Rs. 1000 each as against Rs. 1200 each and this difference of Rs. 200 per party and Rs. 400 in totality i.e. including both employer and employee, will be paid out to you as increased in hand salary. This is when the employer's share to the EPF contribution is also paid out to the employee which may rather not be the case actually.

So most probably, take home pay of a salaried class individual will go higher by 2% of the basic wages and dearness allowance for the salary that is due in June, July and August 2020.

EPF Rate Reduction Will Increase Take-Home Pay But Will Have Income Tax Implications

This has been clarified in a statement by the labour ministry which said, "As a result of reduction in statutory rate of contributions from 12% to 10%, the employee shall have a higher take home pay due to reduction in deduction from his pay on account of EPF contributions and employer shall also have his liability reduced by 2% of wages of his employees," the ministry said.

"If Rs. 10,000 is monthly EPF wages, only Rs. 1,000 instead of Rs. 1,200 is deducted from employee's wages and employer pays Rs. 1,000 instead of Rs. 1,200 towards EPF contributions. In Cost to Company (CTC) model, if Rs. 10,000 is monthly EPF wages, the employee gets Rs.200 more directly from employer as employer's EPF/EPS contribution is reduced and Rs. 200 less is deducted from his/her wages," it said.

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