Centre has reduced both employer and employee contribution in the EPF account as a Covid measure.
However, going by the information currently available in public domain, employers may or may not add this saving to the employees’ salaries. While the reduction in employees’ contribution will be added to their take home salaries, it is not clear whether employers will have to add their saving to the employees’ take home pay. If the employers’ saving on PF contribution is not added to the employees’ salary, it would mean a net loss for the employee to that extent.
As per the finance ministry announcement: “Businesses need support to ramp up production over the next quarter. It is necessary to provide more take home salary to employees and also to give relief to employers in payment of Provident Fund dues”. This appears to indicate that the reduction in EPF contribution by the employer is not meant to be transferred/added to the take home salaries of the employees because if this were to happen then there would be no net ‘relief’ for the employer organisations.
However, the final word on the above will be known only once the notification clarifying this step in legal terms is issued.
The government has cut the Employees’ Provident Fund (EPF) contribution by both employer and employee for the next three months i.e. June, July and August, 2020.
Employees need to know that contribution to their EPF accounts can be claimed as tax break in case their salary falls in taxable bracket. Therefore, the cut in the employees’ contribution will mean that the corresponding tax break will also reduce to the same extent. Additionally, this cut would mean a lowering of their EPF corpus or retirement savings.
According to experts, whether the employer is required to add its saving on PF contribution to the employees’ take home salaries will depend on whether the employers’ contribution was included in the CTC (Cost to company) agreed upon in the employment contract with the employee. Here is what experts say:
Saraswathi Kasturirangan, Partner, Deloitte India says, “There is a question on whether the reduction in PF contribution rates from 12% to 10% will benefit the employer or the employee. This would depend on the employment contract terms. Where the CTC is agreed with the employee and this includes statutory PF contribution, the employee will have higher take home as the differential in employer contribution is likely to be paid out as taxable allowance. However if the terms of employment indicate that the company is responsible to pay the statutory contribution without it being linked to a predetermined amount, the employer cost is likely to reduce. Employer may need to look at the contracts to determine how they would want to process the payroll for the next three months.”
Pooja Ramchandani, Partner, Shardul Amarchand Mangaldas and Co, says, “The statute does not cast an obligation on the employer to pay the remaining 2% to the employee as salary. Such payment if at all will depend on the construct of the employment agreement”.
Dr Suresh Surana, Founder, RSM India says, “In the provident fund relief, the contribution for the next 3 months (June, July and August 2020) would stand reduced from 12% to 10% for both the employers and employees. This would provide much relief to the employers who will have a direct savings on this account and employees will have a higher take home salary. The question whether the employer is obligated to pay the reduced two per cent from his contribution to an employee is a matter of employment contract and policy interpretation. If under the employment contract, there is no separate mention of employer’s contribution, the employer is not obliged to pay his saving on account of reduced employer’s contribution. However, in case the CTC is a composite number with the break up, it is possible that your employer may pay you the reduced two per cent as a part of your salary. It would appear that the employer is not obligated to pay you this reduced part as this is a statutory obligation governed by law. For instance, if instead of a reduction in PF rate, had the government increased the statutory contribution rate for PF from 12 per cent to 15 per cent, the employer may not be able to recover the additional contribution from employees salary.”
Puneet Gupta, Director, EY India says, “Employee’s share of contribution is deducted from post-tax salary of the employee. Thus, reduction in employee’s share of contribution from 12% to 10% will increase the monthly take-home salary in the hands of employee. If an employee wants to contribute in excess of 10% of monthly pay towards Provident Fund, the same can be done as Voluntary Provident Fund contribution. Employer’s contribution to Provident Fund is deposited in addition to the monthly salary paid to employee. In some cases, the employer’s contribution to Provident Fund is part of agreed CTC with the employee. In other cases, the employer’s contribution is a benefit offered to employees in addition to agreed CTC / salary. Where employer’s contribution forms part of agreed CTC with the employee, the balance employer’s contribution (2% of monthly pay) may be paid to employees as cash allowance. This will further increase the monthly take-home salary in the hands of employees. However, the cash allowance will be taxable in the hands of the employee. Where employer’s contribution is an additional benefit over and above CTC agreed with the employee, the balance employer’s contribution (2% of monthly pay) may lead to cost saving for the employer and loss to the employee. Also, it remains to be seen whether such reduction in rate of contribution from 12% to 10% is optional or mandatory change for employers and employees. One may need to wait for the official notification to understand the implications for employers and employees under different scenarios.”