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

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On 13 May, to provide more money in the hands of employees and lower the burden on employers, Finance Minister Nirmala Sitharaman announced the relaxation of statutory PF contribution rules.

To provide Rs 6,750 crore liquidity support, statutory PF contribution of the employees as well as employers will be reduced to 10% from 12% for all establishments covered by EPFO for the months of the next 3 months.

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

The change will, however, not apply to government employees, that is, CPSEs and state PSUs will continue to provide 12% contribution.

Also for companies employing up to 100 workers of which 90% earn less than Rs 15,000 each per month, the government had announced in March an EPF support for from March to May, under the PM Garib Kalyan Package wherein the government would be making EPF contribution on behalf of employers and employees. This provision has been extended by another 3 months to salaries of June, July and August 2020 to provide liquidity relief to 3.67 lakh establishments.

To those private businesses that were not covered in the 24% EPF support provided by the government under the PM Garib Kalyan Package, the EPF contribution could be lowered to 10% for 3 months.

Income tax implications

1) New tax regime

Remember, there are two tax regimes, which you can follow, when you file your tax returns for 2020-21. under the new tax regime, there are no tax benefits available under Sec 80c, but, you can avail reduced tax slabs. So, even if your EPF contribution as per the new economic package stands reduced to 10% from 12%, it makes no difference.

2) Old tax regime

If you are to follow the old tax regime, lower EPF contribution as recommended by the Finance Minister for three months, will reduce your investments under section 80(C) for the financial year 2020-21. This means your tax liability will go up.

If you do not have immediate requirements to fulfil with this additional cash inflow, you may choose to make or increase your voluntary provident fund (VPF) contribution. VPF contributions earn the same rate of interest as EPF and will not disturb your contributions towards your retirement. You can talk to your company's HR department for the additional contribution towards VPF.

 

If you are far from retirement, you may look to invest this extra cash inflow into ELSS (equity-linked savings scheme) or PPF (public provident fund) scheme, both of which are eligible for deduction under Section 80C, within the Rs 1.5 lakh limit.

Both ELSS (minimum 3 years) and PPF (15 years) investments could be used for any specific needs, like child's education, whereas EPF contribution is strictly a retirement fund with partial conditional withdrawals.

If your concern is retirement savings, you may also look at NPS (National Pension System), the government-backed pension scheme, contributions towards which are also eligible for deduction under section 80C of the Income Tax Act.

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