Reduced Rate Of EPF Contribution & Impact On Stakeholders

The cash flow crunch due to the imposition of the Covid -19 national lockdown across the nation has drove the Indian Government to announce the Atmanirbhar Bharat Stimulus Package that also aims at reduced rates of EPF contribution for both employers and employees in the country. Now, the question is who are eligible for these reduced rates and how will they benefit stakeholders? The Finance Minister of India, Nirmala Sitharaman announced a reduction in the Employment Provident Fund EPF as a part of the Atmanirbhar Bharat Stimulus Package with the goal to provide relief to employers and employees to increase their take-home salaries. A set of FAQs relating to announcement has been released in the EPFO’s official Twitter handle. Click here to view complete list of FAQs. ( **Source: EPFO)

Increase In Take-Home Salaries

The Labour Ministry of India has issued a notification for reduced rates of EPF contribution at 10% to increase the take-home salary of approximately 4.3 crore subscribers of provident fund and to offer relief to approximately 6.5 business establishments. The current rate of EPF contribution for the employer and employee stands at 12%. This step comes days after the Honorable Finance Minister announced the reduction of EPF rates for 3 months as a part of the Rs 20 Lakh Atmanirbhar Bharat Stimulus Package with the goal to infuse an approximate Rs 6,750 crore liquidity into the Indian economy. This EPF reduction will be applicable for the salary months of May, June and July 2020. This notification is applicable to all establishments under the Employees Provident Fund Organizations including establishments that have been exempted. However, the Government as the employer of Central public sector organizations and the State public sector enterprises will adhere to the 12% EPF contribution. The establishments covered under the earlier announcement relating to the Pradhan Mantri Garib Kalyan Yojana of 1.7 lakh crore will not be covered under this notification. ( Click here for details of the EPFO Press Brief)

Insight Into The EPF Reduction & Its Impact

The Pension Fund and The Employee Provident Fund fall under The EPF Act or The Employees Provident Fund and Miscellaneous Provisions Act of 1952 along with its schemes established thereunder. Both employer and employee require to contribute to the provident and pension funds. This rate of EPF contribution is currently 12% of basic wage, dearness allowances and retaining allowances, if any. Out of this 12% contribution rate, 8.33% is deposited in the Pension Fund and 3.67% is deposited in the Provident Fund. For some notified establishments, this rate of contribution, has been reduced to 10% via a Government of India notification in 1997 (1997 Notification). These establishments employ less than 20 employees, jute industries, sick industries to mention a few.

Salient Features To Note

The Government of India has taken the responsibility of contributing to EPF under the Pradhan Mantri Garib Kalyan Yojna prerogatives for commercial establishments having less than 100 employees, where the wages of 90% of these employees are under Rs 15,000. This relief will be available till August 2020.
Date for EPF contribution for March 2020 has been extended by the Government for 30 days for those employers who paid salaries to their employees.
On 15^th May 2020, the EPFO permitted relief from damages in delay for making contribution to the provident fund due to the nationwide lockdown presuming disruption of operations due to the Covid-19 Pandemic.
The major objective of EPF reduction is to increase cash flow to employees and employers. An amendment to the 1997 Notification to EPF was announced. The Government notified the reduction of EPF contribution from 12% to 10% for all establishments with the exception of Government establishments and Public Sector Enterprises for the months of May, June and July 2020.

Impact of EPF Reduction

The relief is available for 3 months only.
The notification will not apply for establishments eligible for relief measures under the Pradhan Mantri Garib Kalyan Yojna
EPF reduction from 12% to 10% will not impact pension fund. It will impact the contribution quantum to the provident fund. 8.33% of the 10% will be still be deposited in the pension fund and 1.67% will be deposited to provident fund.
The take-home salary of the employee will increase however, the higher take- home salary is subject to tax.

The Ministry of Labour & Employment stated, in a press release that in the cost to company model, employees of an establishment should be paid the 2% reduced from the contribution of the employer.

Benefit of Reduced Rates

Questions-

After tax deduction from the increased take-home salary, will there be sufficient liquidity as expected?
Take home salary of the employee is increased however, to what extent?
Is there any kind of relief for the employer in cases where the CTC model is followed?

The answer to the last question lies in the provisions of the Employment Contract of the establishment as neither the recent amendment to the 1997 Notification or the EPF Act of India imposes any such obligation on the stakeholder. The answer to the second question depends upon the amount of the PF contribution. For example, if the wages of the employee are Rs 15,000, the contribution of the provident rate at a 12% rate is Rs 1800 each, every month for the employer and employee. When this rate is reduced to 10% (in the current amendment) the amount will be Rs 1500 each for both the employer and employee. Let us assume the savings of Rs 300 of the employee and employer is paid to the employee. After the income tax (application of the maximum marginal rate at 30% excluding the cess and the surcharge) the amount remaining will be a very nominal amount of Rs 420 only. This will be a point to ponder on by the stakeholder. For the large amount of the workforce in India who are currently eligible for the EPF reduction based on the prescribed threshold under recent announcement in context with The EPF Act, i.e. Rs 15,000, the benefits are negligible. However, there is no mandate imposed by the Government of India on the stakeholder to continue at the 12% EPF reduction rate. Here, stakeholders should weigh the pros and the cons of availing this relief. It is recommended they take financial advice from experienced and sound experts in the above field prior they take the final plunge.