How Reduced Contribution Towards EPF Will Impact You?

A few days back, Nirmala Sitharaman announced several measures to provide relief to industries and salaried class. In a bid to provide relief to salaried class people the government lowered contribution towards Employees’ Provident Fund (EPF) by employer and employee for the next three months on 18 May.

However, the EPFO came out with detailed FAQs to provide clearance on this matter. In that notification, EPFO clarified that those employers who are following the Cost-To-Company (CTC) model will have to compensate their employees by paying an amount equivalent to 2 per cent contribution if they are opting for a reduced contribution of 10 per cent instead of 12 per cent.

As per the clarification provided, it is not mandatory for the organisation to go for lower contributions, if they are comfortable they can continue contributing at higher levels. As per the FAQs released by the EPFO, “The reduced rate of contribution of 10 per cent is the minimum rate of contributing during the period of the package. The employer and employee or both can contribute at a higher rate also.”

As a consequence of this decision, the PF will not have any impact on the in-hand salary of the employee. Since, PF is a part of the CTC of employee, so  it will bring it down. EPFO further clarified that the employer will have to compensate the employee for the drop in CTC if the employer decides to contribute at a lesser rate. Hence, if your employer was earlier contributing Rs 1200 and now the organisation opts for lower contribution, it will come down to Rs 100, then your CTC will reduce by Rs 600 on account of lower PF contribution.

Clarifying further about the impact of this move on the pensions, EPFO further clarified that a reduced rate of EPF contributions to 10 per cent will not reduce the pension contributions or benefit.