Greetings of the day!
This edition will provide you with an in-depth analysis of how the reduction in the EPF contribution rate announced on 18th May, 2020, will affect you as an employee/employer.
“THE BURNING TALE”
As a part of the economic relief package, the Finance Minister announced a reduction in contribution towards the EPF from 12% to 10% for both, the employers and the employees for next 3 months, i.e. May, June and July 2020. However, the establishments owned or run by the government and state and establishments eligible for PMGKY benefits will continue to contribute 12% to the EPF. It is seen as a move that would provide immediate relief to both the employees and the employers but who is really making the most of this package? The employee, the employer or the government?
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Impact on the employers
The reduction in the rate of contribution will reduce the liability of the employer by 2% of the wages of the employees. This will enhance the liquidity for the employer and will help the establishment to use the available funds to increase their production. However, in case the CTC is fixed then the employer will have to reimburse the difference in employer share (2%) to the employee. Hence, such companies with fixed CTCs will not benefit from this reduction in contribution.
Impact on employees
In the short run, the move will provide higher take home pay to the employees but it is them who’ll be hit in the long runas their CTC will fall for three months. Moreover, many employees have already faced a pay cut and this cut of EPF will add to it. The EPF is a part of the retirement corpus. So, the compounding effect of lower contribution for three months would mean loss of a huge sum over the years.
Impact on the government
Though the government has marketed this as a relief provided by them, the reality is that the government hasn’t funded any of it. It is the employees who are funding the employer by taking a 2% cut in their CTC while the government takes the credit for it. Interest rates on the EPF are falling, lakhs of people have withdrawn their EPF and now this contribution cut. It wouldn’t be wrong to say that with this amendment the government is enjoying the best of both the worlds. However as direct support, the government has given benefit only to the handful of the companies under the scheme of PMGKY.
BONUS :- We have made a detailed analysis of the steps taken by the government for PF.
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Frequently Asked Questions
Q1. What is the revised rate of EPF contribution announced by the Central govt. under Atmanirbhar Bharat Package?
Q2. How does the reduced rate of contribution impact the amount of pension in the longer run?
Answer- The EPS contribution 8.33% of wages (Subject to ceiling of 15,000) is diverted from employer’s share of EPF contributions. The reduced rate of EPF contributions to 10% will not reduce the pension contributions or benefits.
Q3. How is benefit availed? One has to pay at full rate and claim reimbursement later or direct payment at reduced rate can be made?
Thank you for pausing from your busy day and gracing us with your precious time. We will get back to you in the next edition with more exciting and interesting updates.
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