EPF contribution for new women workers capped at 8% --Here's what it means

Know your increased take home salary, tax liabilities and more.

Bringing cheers to both new employees and employers covered by the Employees Provident Fund Organization (EPFO), Finance Minister Arun Jaitley has announced that the government will contribute 12 percent of the wages of the new employees in the EPF for all the sectors for next three years.   

Presenting the Union Budget 2018, he also proposed to make amendments in the Employees Provident Fund and Miscellaneous Provisions Act, 1952 to reduce women employees' contribution to 8 percent for first three years of their employment against existing rate of 12 percent or 10 percent with no change in employers' contribution.

“To incentivise employment of more women in the formal sector and to enable higher take-home wages, I propose to make amendments in the Employees Provident Fund and Miscellaneous Provision Act 1952, to reduce women employees’ contribution to 8 percent for first three years of their employment against existing existing rate of 12 percent or 10 percent with no change in employers’ contribution,” Jaitley said in his Budget speech.

The current 8.65 interest rate on EPF deposits was lowered during the last fiscal, from the previous 8.8 percent prevailing in 2015-16.

Under the social security scheme run by the Employees' Provident Fund Organisation (EPFO), the employees contribute 12 percent of their basic wages which goes into their EPF account.

Employers also make a matching contribution of 12.5 percent out of which 8.33 percent goes into Employees Pension Scheme and 3.67 percent is deposited into employees’ EPF account. The employer also pays 0.5 percent of basic wages towards Employees’ Deposit Linked Insurance Scheme.

Talking to Zee Media Digital, Naresh Lath, Partner in Chachan and Lath, said, “The proposed amendment will bring cheers to the employers since this will result into a direct saving to them (approximately one-third will go back to government kitty as direct tax on the savings made) but in case of women employees liable to pay income tax, it is a bitter pill coated with caramel since, though it will increase their take home salary, but it will increase their tax liability also.”

However, the increased take home salary will come out of the reduction in the investment in provident fund from 12 percent to 8 percent resulting into lower deduction under section 80C, Lath added.

Employees contribution to provident fund amongst some other investments is eligible for deduction under section 80C and an employee can save tax on the contributions made up to a maximum of Rs 1,50,000 per year under that section.

Understanding the break-up (based on assumed salary)

Take home salary for a women employee having salary of Rs 10,00,000 per annum will increase by Rs 40,000 per annum due to reduced contribution to provident fund (i.e. 12 percent – 8 percent = 4 percent of Rs 10,00,000). But the women employee will be having lesser amount available for deduction under section 80C due to lower contribution to provident fund resulting in to an increase in her tax liability by Rs 9,205 which is 23.01% of Rs 40,000.

Therefore, though the women employee will be having increased take home salary but, it will come with a cost.

Check out the illustration below