EPF relief to increase take-home wage, but you may end up paying higher taxes

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Both staff and employers collectively contribute 24% of the essential wage plus dearness allowance on a month-to-month foundation in direction of the worker’s provident fund (EPF). Now, they are going to be contributing 20% throughout this era.

If your primary wage plus dearness allowance is 50,000 monthly, your PF contribution is equal to 6,000 ( 50,000*12%) and with an analogous contribution by the employer, your month-to-month PF contribution is 12,000. Now, the decreased contribution will likely be 10,000 ( 50,000*20%). Your earnings will increase by 1,000 monthly that’s 2% of your primary wage plus dearness allowance. As your employer will likely be contributing much less, it will deliver down your value to firm (CTC) by 2% for these months.

“Yesterday’s announcement helps EPF employers preserve 2% of value to the corporate (CTC) and aids staff by growing their take-home pay by 2%. We wanted that quantum to be a minimum of 6% (given it’s non-subsidy in nature),” stated Rituparna Chakraborty, co-founder, TeamLease Services.

Tax implications

The decrease EPF contribution and increase in in-hand pay can have tax implications. “The tax will likely be relevant as per the slab since this quantity is handled as earnings,” stated Mrin Agarwal, founder director, Finsafe India Pvt. Ltd.

For instance, in case your earnings will increase by 1,000 and if you fall within the highest tax bracket, your take-home will solely go up by 700 as relaxation will likely be deducted as tax.

Employees additionally avail of tax deductions beneath part 80C in opposition to the contribution in direction of EPF. As the contribution will likely be decrease, they may have to save extra through different funding choices to use Section 80C or else can have to pay higher taxes.

If your three months PF contribution was 18,000 and you had been within the highest tax bracket, you had been in a position to save 5,400 on taxes by claiming a deduction of 18,000. Now as your contribution will go down to 15,000, you will likely be in a position to declare a lesser deduction and tax financial savings may even go down to 4,500. You can have to save a further 3,000 beneath different eligible investments beneath Section 80C if you had been utilizing PF contribution to exhaust your Section 80C deduction restrict.

“With the 10% EPF contribution, staff can have considerably higher money stream, ultimately because the 12 months progresses people can have to assess and make tax investments,” stated Shalini Dhawan, co-founder Plan Ahead Wealth Advisors.

“This EPF contribution will likely be decrease for these three months, which will be caught up by different 80C investments. ELSS or life insurance coverage protection premiums and even voluntary provident fund contribution is eligible for Section 80C advantages,” she added.

Lower retirement corpus

Provident fund is likely one of the hottest retirement financial savings merchandise the place individuals get the good thing about compounding to develop their retirement corpus. Therefore, decrease PF contribution may even imply that your retirement financial savings kitty will likely be impacted.

“Somebody, who’s seeing potential job loss or vital wage lower, will get some assist by means of decrease PF contribution, but those that are in a position to handle the state of affairs and are usually not impacted by the covid-19 disaster will truly lose on the retirement corpus,” stated Anil Rego, CEO and founder, Right Horizons.

If you alongside together with your employer had been contributing 12,000 monthly in direction of the PF, the contribution will scale back by 2,000 monthly for the three months. So, if anyone will likely be retiring after 25 years, then it will scale back the retirement corpus by round 46,000 supposing PF grows at a charge of curiosity of 8.55% every year all through this era.

As contributing a decrease quantity in direction of PF isn’t non-compulsory and everybody can have to contribute a lesser quantity, those that are in a position to handle their money flows ought to ideally make investments the quantity obtained in hand due to decrease PF contribution.

“If somebody is in a position to handle the money stream, it may make sense to make investments the quantity obtained in direction of investments reminiscent of a voluntary provident fund,” stated Rego.

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