PF relief may be taxing in the long term
2 min read . Updated: 18 May 2020, 08:24 AM IST
Premium- Though your in-hand salary will increase, you will be liable to pay more income tax. Also, this can dent your overall long-term retirement corpus
With the government reducing the Employees’ Provident Fund (EPF) contribution, you will now get a slightly higher in-hand salary every month for three months. But this will also mean that you will be liable to pay more income tax, and can put a dent on your retirement corpus. In order to provide more liquidity in the hands of employees and ease the cash crunch that employers may be facing, last week, the government reduced the monthly EPF contribution for both employees and employers from 12% each to 10% each for the next three months.
Both employees and employers together contribute 24% of the basic salary plus dearness allowance on a monthly basis towards EPF. Now, they will be contributing 20% during this period.
For instance, if your basic salary plus dearness allowance is ₹50,000 per month, your PF contribution is equal to ₹6,000 ( ₹50,000 x 12%). With your employer contributing an equal amount, the total outgo is ₹12,000 ( ₹50,000 x 24%). With the reduction of 2%, your reduced contribution will be ₹5,000 ( ₹50,000 x 10%). This means your in-hand income will increase by ₹1,000 per month. Since your employer will be contributing 2% less, too, the reduction will also bring down your cost-to-company (CTC) by 2% for these months.
“The announcement helps EPF employers conserve 2% of the CTC and aids employees by increasing their take-home pay by 2%. We needed that quantum to be at least 6% (given it is non-subsidy in nature)," said Rituparna Chakraborty, co-founder, TeamLease Services, an HR solutions provider.
Tax implications
The lower EPF contribution will also have tax implications. “The tax will be applicable as per the slab since this amount is treated as income," said Mrin Agarwal, a financial educator, founder director of Finsafe India Pvt. Ltd and co-founder of Womantra. For example, if your income increases by ₹1,000 and if you fall in the highest tax bracket of 30%, your take-home will only go up by ₹700 as the rest will be deducted as tax.
Also, you may have to invest more to save taxes under Section 80C of the Income-tax Act, 1961. Since EPF contribution is eligible for tax deduction, reduction in the contribution will also mean you are investing less to save taxes. So, you will have to save more via other investment options to exhaust the Section 80C benefit or else will have to pay higher taxes.
If your three-month PF contribution was ₹18,000 and you were in the highest tax bracket, you were able to save ₹5,400 in taxes by claiming a deduction of ₹18,000. Now, as your contribution will go down to ₹15,000, you will be able to claim less deduction and your tax savings will also go down to ₹4,500. This means you will have to save an additional ₹3,000, the amount by which your EPF contribution has gone down, in other tax-saving instruments eligible under Section 80C.
