The Union Budget for 2018-19 has said that the government will bear the 12% contribution to the retirement corpus of salaried individuals in the Employees’ Provident Fund for the first 3 years of their employment. “I am happy to announce that the government will contribute 12% of the wages of the new employees in the EPF for all the sectors for next 3 years," finance minister Arun Jaitley said in his Budget speech.

In the Budget for 2016-17, the government had first introduced a contribution of 8.33% of Employee Pension Scheme for new employees for 3 years, applicable for those earning upto 15,000 a month. Every month, 12% of an employee’s (basic) salary goes into the EPF account and the employer matches the contribution. Of the employer’s contribution, 8.33% goes into the Employees’ Pension Scheme (EPS), which offers pension from the age of 58 .

The government taking over the responsibility of paying this 8.33% of the basic salary was intended to incentivize employment generation. Similarly, this time too the government is aiming to increase employment by extending the entire 12% employer contribution for the first 3 years of employment for an individual.

“This will help in bringing more employees in the formal sector to some extent and increase job creation. The government footing at least a part of the employers’ contribution bill should encourage more employers to adhere to compliances and increase formalization of the MSME (micro, small and medium enterprises) sector," said Sonal Arora, vice-president of TeamLease Services, a staffing and training company.

Arora said that India has one of the highest mandatory payroll deductions in the world with almost 35% of low-wage employees’ salary being deducted towards statutory deductions, which reduces their net take-home salary and pushes them to the informal sector where these deductions are not applicable.

This is where the government’s new proposal comes in; to reduce women employees’ contribution to 8% for first 3 years of their employment, against the existing rate of 12%. To make this happen, the Budget has proposed to amend the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952.

The employer contribution for them will remain at the existing level of 12%. This will mean a higher take-home pay for women in their initial years in the workforce. “One does hope that employers will pass on the benefit of lower provident fund contribution rate to the employee by way of increased take-home, as against reduced CTC (cost to company)," Arora said.

However, this will also mean a proportionately lower saving for them.

“The government’s intention is to improve women’s participation in the workforce, which is a good thing. But reducing the EPF contribution should not have been done. This is a compulsory saving that is a very good support in the long run as it has an EEE (exempt , exempt, exempt) tax treatment. Already, savings habits among the younger generations are on a decline," said Prakash Praharaj, founder Max Secure Financial Planners. Though the impact of the 4% reduction over three years will not be significant, it nevertheless should have been avoided, he said. “Maybe the government could also have considered contributing an additional differential amount of 4 % for women employees," Arora said.