To mitigate the liquidity crisis during the current severe situation with regard to the tremendous spread of Covid-19, the Government of India has introduced ‘Atmanirbhar Bharat Package’ under which the contribution under Employees Provident Fund & Miscellaneous Provisions Act, 1952 (“EPF Act”) has been reduced to 10% from the existing rate of 12% for all class of establishments covered under the EPF Act along with the exempted establishments. However, the establishments which are owned, controlled by or under the control of State or Central Government or establishments eligible for PMGKY are not eligible for the afore-mentioned reduction. The afore-mentioned reduction of the EPF rate is for the wage months of May 2020, June 2020 and July 2020[1], irrespective of the date of payment. The establishment shall remit dues at the afore-mentioned reduced rate through the Electronic-Challan cum Return (ECR) itself.
Impact on employer and employee:
Impact on non-CTC model of wage:
As a result of the aforementioned reduction in statutory rate of contributions from 12% to 10% of basic wages and dearness allowances, the Government of India has clarified that the employer and employee both shall enjoy the benefit, which means that the employee shall have a higher take-home pay due to reduction in deduction from his pay on account of EPF contributions and employer shall also have its liability reduced by 2% of wages of his employees.
So for example, if A draws Rs.20000/- monthly EPF wages, only Rs.2000/- instead of Rs. 2,400/- is deducted from A’s wages and the employer pays Rs.2000/- instead of Rs. 2,400/- towards EPF contributions. Therefore, where A, before the afore-mentioned reduction had a take-home pay of Rs. 17,600/- would now have Rs. 18,000/- in hand. Similarly, the employer’s liability to pay EPF reduces and it saves Rs. 400/- with itself.
Impact on CTC model of wages;
In Cost to Company (CTC) model, the Government of India has clarified that the employer shall not have any benefit and that the benefit would pass to the employee, which means that the amount saved with the employer due to the afore-mentioned reduction of the EPF rate is paid to the employee.
So for example, if A’s monthly EPF wages in CTC Model is Rs. 20,000/-, the employee gets Rs 400 more directly from employer as employer’s EPF/EPS contribution is reduced and Rs 400 less is deducted from A’s wages.
Notwithstanding the above, under section 6 of the EPF Act, an employee has the option to contribute at a rate higher than statutory rate, i.e., 10% but the employer can restrict its contributions to 10% (statutory rate) in respect of such employee. Therefore, in such case:
a. If both employer and employee contribute @ 12% of monthly pay, then there are no additional take-home salary or income tax implications in the hands of the employee;
b. If the employer contributes @ 10% of monthly pay and employee contributes @ 12% of monthly pay, then reduction in employer’s share of contribution from 12% to 10% of monthly pay will increase the monthly take-home salary in the hands of employee, where the employer pays the differential to the employee as additional payment.
Authors: Prashant Jain, Co-Founder & Partner; Abhishek Gupta, Associate.
Disclaimer: The content of this article is intended to provide a general guide to the subject matter. For any queries, the authors can be reached at (i) prashant@samistilegal.in (ii) abhishek@samistilegal.in.
[1] SO 1513 (E) dated 18.05.2020
