As part of the Atma Nirbhar Bharat package, Employees' Provident Fund Organisation has notified reduction in EPF deduction rate from 12 per cent to 10 per cent on May 18, 2020. It is applicable on wage months May, June and July in 2020 for all class of establishments covered under the EPF & MP Act, 1952. This move will impact 4.3 crore employees and 6.5 lakh establishments. Government's intention behind this move is to give some additional cash in the hands of both the employees and employers, which can help them to tide over the immediate liquidity crisis to some extent. We tell you how it will impact your personal finance and what you should do.
Who are not impacted?
There are certain organisations which are completely exempted from this waiver, including public sector enterprises or any other establishment owned or controlled by the central government or state governments. These establishments will continue to contribute 12 per cent of basic wages and dearness allowances. The reduction is also not applicable to vulnerable segment workers who have been covered under Pradhan Mantri Garib Kalyan Yojana (PMGKY). Under PMGKY, the entire employees EPF contributions (12 per cent of wages) and employers' EPF & EPS contribution (12 per cent of wages), totalling 24 per cent of the monthly wages, is being contributed by the central government.
Employees on the losing side
In terms of net monthly take home salary, the impact is only 2 per cent of basic salary and dearness allowance that the employees will get in hand. However, if you consider the reduction of similar contribution by the employers then the employees would be incurring a loss. "In Cost to Company (CTC) model, if Rs 10,000 is monthly EPF wages, the employee gets Rs 200 more directly from employer as employer's EPF/EPS contribution is reduced and Rs 200 less is deducted from his/her wages," said the press release from the government.
What it means that affected employees will lose 2 per cent of their basic salary and dearness allowance which could have gone to their EPF kitty as employer's contribution. "For salaried people, it seems like little more money in hand. Which is true, but employer's contribution also would be lower to that extent. Hence ultimately, your total money at the end of the day would be a little lower. Saving is relevant for everybody. If someone has sizable savings otherwise, then that is a different issue," says Joydeep Sen, Founder, wiseinvestor.in.
Should you do something?
If you need some extra money and don't mind retirement contribution coming down for a temporary period, then it is fine for you. However, for many employees who do not wish to reduce their critical retirement savings, even for a short period, there is an option. "Under the EPF Scheme, 1952 any member has the option to contribute at a rate higher than statutory rate (10 per cent) and employer can restrict his contributions at 10 per cent (statutory rate) in respect of such employee," said the press release from Ministry of Labour and Employment. What it means that you can request your employer to keep your contribution unchanged at 12 per cent. However, this does not mean that your overall contribution to EPF will remain unchanged because employers are expected to contribute only 10 per cent for the next 3 months.
Be ready to supplement your retirement kitty
This reduction currently appears only for 3 months, unless extended again. However, when it comes to retirement savings, which typically require biggest saving of your life, you can always have alternative avenues that run parallel to your statutory saving of EPF. If you have an option like Voluntary Provident Fund (VPF) you can always have the flexibility to increase your contribution and enjoy higher return of EPF. "VPF is a good option if one is investing for the long term, does not require liquidity and has sufficient surpluses to do such investments. It can easily be used to maintain the earlier savings rate too," says Suresh Sadagopan, Founder of Ladder7 Financial Advisories.
Another option which you can consider for retirement saving is Public Provident Fund (PPF). "VPF and PPF both are good; the interest rate in VPF is generally little higher than PPF. PPF becomes more relevant when you stop working, e.g. retirement, because then you may or may not receive interest in VPF. VPF is meant for salaried working people," says Sen of wiseinvestor.in.
National Pension System (NPS) and Sukanya Samriddhi Yojana are also good options for your long term retirement savings. "VPF, PPF and NPS are options one may consider to invest in for retirement funding. These are all good options for this purpose, not just now. Also, Sukanya Samriddhi Yojana is a good tax efficient option for those who have a girl child, for whom they want to accumulate for education and marriage," says Sadagopan of Ladder7 Financial Advisories.
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