The employee provident fund and pension fund are established under the Employees Provident Fund’s and Miscellaneous Provisions Act, 1952 (EPF Act) and schemes framed thereunder. Both employer and employee are required to contribute to the provident fund and the pension fund.
The rate of contribution is 12% of the basic wages, dearness allowance and retaining allowance (if any). Out of the 12%, 8.33% is deposited to the pension fund and 3.67% is deposited to the provident fund. For a few notified establishment this rate was brought down to 10% by a notification of the Government of India in the year 1997 (1997 Notification). These include establishments employing less than 20 employees, sick industries, and jute industries, to name a few.
The liquidity crunch caused by the lockdown across industries implored the Government of India to announce a number of reliefs with respect to the provident fund obligation of employers:
# The Government took on the onus of contributing towards provident fund under the Pradhan Mantri Garib Kalyan Yojna guidelines for establishments with less than 100 employees where 90% employees earn wages less than Rs 15,000. This relief is available until the month of August.
# Date of contribution for the month of March was extended by the Government by 30 days for employers who paid salary to their employees.
# On May 15, the EPFO granted relief from imposition of damages for delay in making provident contribution during the lockdown period on the presumption of no mens rea because of the disruptions in operations.
# With the objective to provide liquidity in the hands of employers and employees, the Government announced a reduction in the rate of provident fund contribution to 10% for all establishments except Public Sector Enterprises and establishment controlled by the Government for the months of May, June and July. This was brought about by an amendment to the 1997 Notification.
Significant points to know in relation to the reduction in the rate of provident fund contribution are:
# This relief is available for only 3 months.
# It does not apply to establishments eligible for relief under the Pradhan Mantri Garib Kalyan Yojna.
# The reduction from 12% to 10% will impact the quantum of contribution to the provident fund and not the pension fund. This means out of the 10%, 8.33% will continue to be deposited to the pension fund and 1.67% will be deposited in the provident fund.
# The take home for the employee will increase but the increased take home will be subject to income tax.
The Ministry of Labour & Employment also issued a press release stating that in a cost to company model, employees should be paid the 2% that is reduced from the employer’s contribution.
Thus, the question arises what is the actual benefit for stakeholders?
# On one hand, the take home of employees is increased but to what extent? After deduction of tax from the higher take home, is there adequate liquidity?
# On the other hand, whether there is any relief for the employer at all in cases where the CTC model is followed?
The answer to the latter question is in the construct of the employment contract since neither the EPF Act and nor the recent amendment made to the 1997 Notification imposes such an obligation.
The answer to the former question depends on the quantum of the provident fund contribution. To illustrate where PF wages is Rs 15000, PF contribution at the rate of 12% is Rs 1800 per month for employer and another Rs 1800 per month for employee. With the reduced rate, this amount will be Rs 1500 each for employer and employee. Let’s say the saving of Rs 300 of the employer and employee both is paid to the employee. After tax (applying the maximum marginal rate of 30% excluding sur-charge and cess), this amount will be a meagre Rs 420 only.
A substantial number of organizations base PF contribution on Rs 15000 (prescribed threshold under EPF Act). Hence for a large section of the workforce, the benefit is quite miniscule. Since there is no embargo to continue to contribute at 12%, stakeholders should consider the benefit of availing this relief prior to taking the plunge.
(By Pooja Ramchandani, Partner, Shardul Amarchand Mangaldas & Co)
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