In a case where the CTC does not include the employer’s contribution, then the take-home salary increases by 2 per cent of the basic salary minus TDS.
The Government of India has reduced the statutory 12 per cent contribution to EPF by employers and employee to 10 per cent each for three months. This decision is expected to put more money into the hands of employees. But at the same time, it will also increase their tax liability. Archit Gupta, Founder and CEO, ClearTax, told FE Online that the EPF contribution is calculated as a percentage of the Basic Salary plus Dearness Allowance (DA) of an employee. The EPF contribution from both the employer and employee has been cut to 10 per cent from 12 per cent of the basic salary for the next three months from June to August 2020.
Generally, the CTC (salary package) includes only the employees’ contribution to PF. Gupta said, “A reduction in the PF contribution of an employee also reduces the tax deduction available for tax-saving under section 80C. This will impact the tax (TDS) liability of the employee.”
“Any increase in take-home pay due to reduced EPF contribution will be partially offset by an increase in TDS on such increase.”
According to Gupta, in a case where the CTC does not include the employer’s contribution, then the take-home salary increases by 2 per cent of the basic salary minus TDS. If the CTC includes both the employer’s and employees’ contribution, then the EPF cut can increase the take-home salary by 4 per cent of the basic salary minus TDS.
However, he cautioned, “Employers may not pass the benefit to their employees. The EPF relief measures require necessary amendments to the EPF Act. The legal position can be clear after the passing of notification/circular amending the EPF Act.”
Illustration: Impact on TDS liability of an employee
Gupta said, “In the illustration, we assume the individual drawing monthly basic salary of Rs 25,000 and Rs 40,000 to fall in the 20% tax bracket (after standard deduction and other allowances). This is because any individual whose total income stands at Rs 5 lakh and below is entitled to a tax rebate under section 87A.”
What to do with surplus money
The Cleartax founder suggested that employees can use the surplus money for consumption or they may invest the same for tax-saving purposes to make up for the lost tax deduction. They can invest in PPF, mutual fund ELSS, NSC or other saving instruments. In case of any excess TDS, they can claim a refund while filing their tax return next year in July 2021.
“In these tight-liquidity conditions, one needs to be risk-averse and look for the safety of their money with an annual return on investment. Equity investments give high returns in comparison to government-backed savings schemes, however, you should consult an investment expert, analyse the investment in the light of your risk appetite and then invest,” he concluded.