Employees Provident Fund calculation: How much more you will take-home after PF rules change for COVID-19

EPF calculation: In the CTC salary model, take-home pay goes up by 4% of wages before tax, but for others hike in take-home is at the cost of reduced total salary.

Employees Provident Fund (EPF) Calculation: In order to tide over the immediate liquidity crisis due to Covid-19 pandemic, the ministry of labour and employment has notified the reduced rate of provident fund contribution for employer and employee from existing 12% of monthly basic pay and dearness allowance to 10% for the months of May, June and July 2020. This will cover all classes of establishments covered under the Provident Fund Act barring central and state public sector enterprises or any other establishment owned or controlled by or under control of the central government or state government.

The move is intended to benefit both 4.3 crore members and 6.5 lakh establishments. There is no change in the EPF administrative charges (0.5% of EPF wages subject to minimum of Rs 500) and EDLI contributions (0.5% of wages) both payable by employers. The reduced rate of contribution (10%) is minimum rate of contribution during the three months. The employer, employee or both can contribute at higher rate also.

While the lower rate of contribution will reduce the EPF corpus in the long run, it will not reduce the pension contribution as 8.33% of wages (subject to ceiling of Rs 15,000) will be diverted from employer’s share of EPF contributions to Employees’ Pension Scheme (EPS).

Employees will have a higher take-home pay due to cut in EPF contribution and even the employer will have its liability reduced by 2% of employee’s wages. For example, if an employee’s monthly EPF wage is Rs 10,000 , then Rs 1,000 will be deducted instead of Rs 1,200 earlier. The employer’s share of contribution will also be Rs 1,000 instead of Rs 1,200.

The FAQs issued by EPFO says that in cost to company (CTC) model, if Rs 10,000 is monthly EPF wages, then the employee will get Rs 200 more directly from employer as employer’s EPF/EPS contribution is reduced and Rs 200 less is also deducted from the employee’s wages.

Increase in take-home
The reduction in employee’s share of contribution from 12% to 10% of monthly EPF wage will increase the monthly take-home salary of employees. In the CTC model, reduction in employer’s share of contribution from 12% to 10% will also increase the monthly take-home salary of the employee—where the employer pays the differential to the employee as additional payment. The additional payment will be taxable in the hands of the employee. For instance, in our example of Rs 10,000 wage, the employer and the employee contribute Rs 1,000 each instead of Rs 1,200 each earlier. In the CTC model, the employee has additional take-home salary of Rs 400, less applicable income tax on Rs 200 paid by the employer as additional payment because of the reduced employer’s contribution.

Voluntary Provident Fund
For salaried employees, EPF is an ideal way to save for long-term goals provided the subscriber doesn’t withdraw the corpus at every job change. Investment in EPF gets a tax break of Rs 1.5 lakh under Section 80C, the interest earned is tax free and the final withdrawal after retirement is also tax free. The interest rate for 2019-20 is 8.5%, one of the highest among all fixed income instruments.

As the lower contribution to EPF will impact the corpus in the long-run, those who are not facing any cash crunch situation can opt for voluntary provident fund contribution (VPF). However, an employee will have to check with the employer as most of them allow their employees to start VPF in the month of April—the beginning of the financial year. The interest rate of VPF is the same as the EPF. If VPF is not possible, then one can look at investing in Public Provident Fund. However, the interest rate is lower at 7.1%.