Amidst the ongoing coronavirus pandemic, the government has made several announcements to ensure proper relief for the people. One such announcement was the reduction in statutory deductions on Employees’ Provident Fund (EPF) contributions.

In a press conference, the Finance Minister Nirmala Sitharaman informed that according to new rules, the EPF’s contribution for both employees and the employers will be cut by a total of 4% for the May-July period.

During the press conference, Sitharaman said, “Businesses need support to ramp up production over the next quarter. It is (also) necessary to provide more take home salary to employees and also give relief to employers in payment of provident fund dues. Therefore, statutory PF contributions of both employers and employees will be reduced to 10% for all establishments covered by EPFO for the next three months.”

Let us understand what does that mean:

According to the social security rule, an employee has to make a monthly contribution of 12% the monthly pay that includes basic pay, retaining allowance and dearness allowance as EPF deductions for the retirement kitty maintained by the Employees' Provident Fund Organisation (EPFO). Now, the employer too has to pay the same amount, i.e., 12% of the employee’s basic pay into the EPF.

To understand clearly, let us take an example. If a person’s monthly salary is 30,000, he/she will have to pay Rs 3,600 a month (12% of basic pay) as a contribution towards EPF. The employer also had to pay the same amount each month.

Now, after the announcement by the Finance Minister, the statutory deduction has been reduced with a cut of 4% (2% each for the employer and the employee). In simple words, the EPF contributions have now been reduced to 10% each for 3 months.

However, this rule does not apply fully to central public sector enterprises and state Public Sector Undertakings (PSU). They will continue to pay 12% of the employer share while the employees will give 10%.

How it will affect the salary?

This relief measure will offer two benefits: It will reduce the employee costs for private companies and the employees will take more salary home with a 2% increase. These will increase the liquidity for individuals in the times of cash crunch.

However, there are some confusing “cons” as well about what will happen to the employer’s 2% contribution. Usually, the 12% contribution made by the employer is included in the total CTC of an employee. But now, with the reduction in the mandatory amount, some employees might not pass the benefit of the remaining 2% to the employees.

These doubts will linger in the minds until further PF notifications are released by the authorities.

For more such updates, keep reading BankingOnTips.