Lower EPF contribution to increase your tax liability, reduce PF accumulation

By: |
May 18, 2020 10:11 PM

The reduced contributions to the Employees' Provident Fund (EPF) would ensure higher liquidity in the hands of both the employers and employees.

Coronavirus Outbreak, Novel Coronavirus COVID-19, COVID-19 stimulus package, Employees' Provident Fund, EPF, lower PF contribution, income tax, tax liability, retirement corpusThe higher take-home salary would increase the tax liability of the employees.

To put the Corona-hit economy on the growth path, Finance Minister Nirmala Sitharaman has announced various measures as part of the government’s Mega Fiscal Stimulus package, including lowering of the contributions to the Employees’ Provident Fund (EPF) from 12 per cent to 10 per cent for the next three months till August 2020 by both employers and employees having basic salary of more than Rs 15,000 a month.

Such measures were the need of the hour as the nationwide lockdown imposed to contain the spread of highly contagious Novel Coronavirus COVID-19 has stalled the economy and the primary objective of the government is to kick start the growth engine.

The reduced contributions to EPF would ensure higher liquidity in the hands of both the employers and employees, as employers will contribute 2 per cent less, which would provide them some relief at the moment of severe fund crunch, while employees will get higher in hand salary as the deductions from their basic salary on account of PF contributions will be 2 per cent less.

The enhanced liquidity would result into higher spending, which would create a demand pull to lift the economy activities to a higher level.

While the cut in the EPF contribution rate is good for the economy, the higher take-home salary would increase the tax liability of the employees already having basic salary of over Rs 15,000 per month and despite providing short-term relief, it would hit the long-term objective of higher accumulation of PF fund.

For example, if the monthly basic salary of an employee is Rs 1 lakh, his/her monthly take home salary per month for the next 3 month will be Rs 2,000 higher and the employee would get Rs 6,000 more during the 3-month period.

Unless there is a scope for making further tax-saving investments and the amount is invested to save tax, the employee would end up paying more tax.

On the other hand, with both the employer and employee contributing less, there will be Rs 4,000 lesser monthly contributions for the next 3 months, amounting to total loss in contribution of Rs 12,000 during the period, which would put a dent on long-term objective of creation of higher retirement corpus.

To compensate the loss, the affected employees need to make long-term investments in PPF (if not exhausted the option) and/or in a mutual fund, preferably in an equity fund, if the date of retirement is at least 5 years away.

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