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There are continuous discussions among the salaried class regarding the rules and salary structure related to the Employees Provident Fund Organization (EPFO). The biggest question in the minds of crores of employed people working in private and organized sector is whether their in-hand salary is going to decrease in the coming months, especially from October, and the amount going into the PF account is going to increase. Whenever there is a change in the labor code or salary components, it has a direct impact on the salary credited to the bank account at the end of the month. In such a situation, it becomes very important to understand what the existing rules say, what is the mathematics of the proposed changes and what will be the profit or loss on your pocket.
Provident Fund is considered to be the biggest financial support for employed people at the time of retirement. EPF account is opened for every employee working in institutions covered under the Employees Provident Fund and Miscellaneous Provisions Act. According to the current system, 12 percent of the employee’s basic salary and dearness allowance (DA) is deposited in the EPF account. Exactly this i.e. 12 percent contribution is also made by the employer (company). Of the company’s 12 percent contribution, 8.33 percent goes to the Employee Pension Scheme (EPS), while the remaining 3.67 percent is deposited in the EPF account. At present the wage ceiling i.e. the limit of mandatory PF deduction is fixed at Rs 15,000 per month, although most companies make this deduction on the actual basic salary of the employee.
There is a long-running discussion about new labor codes regarding salary structure, under which the wage definition has to be decided afresh. According to the provisions of the new rules, it is proposed to make it mandatory for the basic pay to be at least 50 percent of the total salary (CTC) of any employee. At present, most of the private companies keep the basic salary low for tax planning and to keep the take-home salary attractive and divide the remaining part among various allowances like special allowance, travel allowance, medical allowance. In many companies, basic pay is only 30 to 40 percent of the total salary. If the basic salary is compulsorily increased to 50 percent, then naturally the base of PF deduction will increase. This will directly mean that the amount deducted from PF item will increase and the salary coming in hand i.e. in-hand pay will reduce.
This entire change can be understood with a simple and practical example. Suppose the gross salary of an employee is Rs 50,000 per month.
In the old or traditional structure, if the company keeps the basic salary at 35 percent, then the basic pay becomes Rs 17,500. On this, the employee’s PF contribution of Rs 2,100 is deducted at the rate of 12 percent. Rs 2,100 is also given by the employer. In such a situation, only Rs 2,100 is deducted from the employee’s salary.
At the same time, if under the new proposed rules the basic salary is made 50 percent of the total salary i.e. Rs 25,000, then the calculation changes completely. Now 12 percent of Rs 25,000 i.e. Rs 3,000 will be deducted from the employee’s share and the same amount will be added by the company. In this situation, an additional Rs 900 will be deducted from the employee’s hand every month, due to which his in-hand salary will reduce by Rs 900. However, the flip side is that Rs 1,800 (employee + employer) more will be deposited in the PF account every month, which will increase the retirement fund significantly in the long term.
If one’s salary is Rs 1,00,000 per month and the basic pay becomes Rs 50,000, then the PF deduction will directly become Rs 6,000 per month. This may have an immediate impact on the monthly budget, but makes savings essential for long-term investments.
Cash flow at the beginning of the month is very important for middle class families. Home loan EMIs, children’s school fees, house rent and daily expenses completely depend on the in-hand salary. If the rate or scope of PF cut increases in October or the coming time, the monthly budget will have to be readjusted. Employees who have made loan installments of 70 to 80 percent of their take-home salary may have to face some cash crunch. Financial advisors believe that employees should be prepared for this change by cutting down their non-essential expenses, so that there is no financial problem at the end of the month.
Even if the money coming in hand may seem less in the short term, in the long term this change can prove to be very beneficial for the employed people. Increase in basic salary has a direct impact not only on PF but also on gratuity. Gratuity is calculated on the basis of last basic salary and DA. When the basic salary increases, the amount of gratuity received at the time of leaving the job or retirement will also be huge. Apart from this, the annual compounding interest available on EPF is one of the best options in the country in terms of safe and tax-free returns. By depositing additional amount in the PF account every month, the fund received at the time of retirement can increase by lakhs of rupees.
Any amendment in the rules impacts not only the employees but also the balance sheets of the companies. Since the employer also has to pay the same 12 percent contribution as the employee, the financial burden of the company increases when the basic salary increases. Many companies may re-design the CTC structure to balance this additional expense, which may impact employees’ variable pay or annual bonus. HR departments in the corporate sector in India’s major industrial cities such as Delhi-NCR, Mumbai, Bengaluru, Hyderabad, Pune and Chennai are already analyzing various salary models to ensure compliance with the norms and avoid sudden financial shock to the employees.
Salaried employees are advised to keep an eye on their institute’s HR portal or pay-slip. Keep a close eye on any official notification or revision in pay structure at the company level, so that future financial plans can be tailored accordingly.