The government notified the new rules on lower contribution towards the employees’ provident fund (EPF) by employer and employee for the next three months on 18 May. The Employees’ Provident Fund Organization (EPFO) came out with detailed FAQs (frequently asked questions) on 20 May to provide clarity on the statutory reduction on PF contributions.
As per the FAQs, the lower contribution is not mandatory for both the employer and the employee. Apart from this, EPFO has also clarified that those employers who are following the cost-to-company (CTC) model will have to compensate their employees by paying an amount equivalent to 2% contribution if they are opting for a reduced contribution of 10% instead of 12%. Here are some of the key questions answered in the FAQs that you must know.
Can I continue with 12% EPF contribution?
In order to provide some liquidity support to both employers and employees facing cash crunch due to the covid-19 crisis, the government allowed reducing the statutory PF contribution from 12% to 10% each for three months—May, June and July.
As per the FAQs, it is not compulsory for the employer and the employee to opt for lower contribution. “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," the FAQs released by EPFO said. For example, if your basic plus dearness allowance was ₹10,000, then you and your employer were contributing ₹1,200 each (that is 12%). Now both of you can contribute ₹1,000 (that is 10%) per month. So, if you and your employer together were contributing ₹2,400 per month, now both of you can contribute ₹2,000 together.
“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.
Many of the employers are communicating with the employees about the pros and cons of the various options to help them choose. You can check with your employer for the details on the same.
What will be the impact on CTC?
The contribution of the employer towards the PF will not have any impact on the in-hand salary of the employee, but as it is part of the CTC, the lower PF contribution of the employer will bring down the CTC of the employee. Many companies have asked for a clarification from EPFO on the impact on the CTC. EPFO has clarified that the employer will have to compensate the employee for the drop in CTC, if the employer decides to contribute at a lesser rate.
“Where employer’s contribution forms part of CTC of the employee, the employer will make an additional payment to the employee to the extent of 2% of monthly pay in lieu of reduced employer’s contribution," said Sonu Iyer, Tax Partner and National Leader - People Advisory Services at EY India.
However, employees should remember that if they receive the amount equivalent to the 2% PF contribution of the employer, it will be taxable in their hands (Read here bit.ly/2ZwYpYS to know more about the tax aspect of lower PF contribution).
So, if your employer was contributing ₹1,200 and now if he opts for the lower contribution of ₹1,000, then your CTC will reduce by ₹200x3, which is ₹600 on account of lower PF contribution by employer for next three months. So, the employer will have to compensate you for ₹600.
What will be the impact on my pension?
Out of the total contribution of 12% made by the employer, 8.33% of wages subject to a ceiling of ₹15,000 is diverted from the employer’s share of EPF contributions towards employees pension scheme. “The reduced rate of EPF contributions to 10% will not reduce the pension contributions or benefits," clarified EPFO.