While the move would bring in some more immediate cash in the hands of the employee, but it will also deprive her from earning a good return of 8.5% post-tax from EPF, which is equivalent to 12.14% for a person with income taxable in the 30% tax bracket, to 10.6% for those in the 20% bracket, 9.4% in the 10% bracket and around 9% for those in the 5% marginal tax bracket.
As a result, the change does not increase the employee’s total income, but only ensures that a part of the income that was earlier deposited with the high interest generating EPF, will now be paid upfront.
For example, for a person with a monthly salary of Rs 25,000, the contribution to EPF at 12% would be Rs 3,000 and the take-home income would be Rs 22,000. Besides this, the employer would also contribute the same amount in the EPF. So, the total contribution to EPF in the employee’s account would be Rs 6000.
But now, at the rate of 10% each, the total contribution would be only Rs 5000 and the rest Rs 1,000 will be given to the employee as take home. Therefore, his monthly take-home income will be Rs 23,000.
The new scheme would be forthr ee months. So, the net contribution to his EPF account would be Rs 3000 less than what would have accrued in the normal course. But, if the employee is in her thirties and her remaining job tenure is 20 years, her retirement benefit would be lowered by Rs 15,350 and if it is 25 years, the impact would be of Rs 23,000. For higher incomes, the impact would be even more.
The government has also decided to continue the scheme introduced in PM Garib Kalyan Package, under which the government contributes 12% of salary each on behalf of both employer and employee to EPF for June, July and August 2020. The total benefits that would accrue to 72.22 lakh employees is estimated to be about Rs 2,500 crore.
Senior financial consultant and chartered accountant Vivek Jain said those who are getting salary in the present Covid-19 pandemic crisis are better off and do not require this kind of jugglery. Particularly at a time when inflation is low and markets are closed, most of the expenditure is already curtailed. At this point of time, any additional money in the pocket at the cost of savings for the future would hardly help.
However, Jaijit Bhattacharya, president, Centre for Digital Economy Policy Research, said the move is aimed at increasing demand in the market.