Various measures have been announced from time to time to provide relief to the employers and employees of the establishments covered under the Employee’s Provident Fund and Miscellaneous provisions Act, 1952 (EPF & MP Act) distressed by the lockdown to prevent spread of COVID-19 and other disruptions due to pandemic.
As part of the stimulus package under the theme “Atma-Nirbhar Bharat (Self-Reliant India), the Finance Minister of India had announced that the rate of provident fund (PF) contribution for both employer and employee will be reduced to 10% from the existing 12% for all establishments covered under the EPF & MP Act. The above announcement has been notified on May 18, 2020. This announcement is intended to help employers and employees who may be facing an immediate liquidity crisis due to COVID-19.
As this measure is directly impacting the payroll process of an establishment as well as the take home salary of an employee for the month of May, June, and July 2020, let us understand this in more details.
Why it is introduced?
In order to provide liquidity in hands of employer and employee this relief is introduced by the Government.
What is the relief?
The Government has notified that the reduction in PF contribution rate from 12% to 10% will be effective for monthly pay for the month of May, June and July 2020. As a result of this, the employee shall have a higher take home pay due to a reduction in deduction from his Salary on account of PF contribution. Further, the employer shall also have its liability reduced by 2%.
To whom it is Applicable?
The relief is applicable to employees of all establishments covered under the EPF & MP Act (including international workers) except below establishments:
- Central public sector enterprises, state public sector enterprises and other establishments owned by or under the control of the central government or the state governments
- Establishments eligible for relief under the Pradhan Mantri Garib Kalyan Yojana (PMGKY)
Applicable for which months?
The relief is applicable for salaries/wage payable for the months of May, June and July 2020.
Is it mandatory or optional?
The reduced rate for provident fund contributions will be mandatory for both employer and employee. However in case of a Cost to Company (CTC) Model, the employee will get the differential employer’s contribution as part of a monthly salary. Also an employee will have an option to contribute to PF at a rate higher than 10% and whereas the employer can restrict his contribution at 10% (statutory rate) in respect of such employees. Let us understand the concept with help of below examples:
In the below examples we have divided the salary packages of an employee in two models i.e.
- Non-CTC model – Where the Employer’s contribution towards PF is not part of the CTC
- CTC Model – Where the Employer’s contribution towards PF is part of the CTC
Example I – Employee and Employer both contribute at the statutory rate of 10%
| Salary Component | Non CTC Model | CTC Model | ||
| Before the Relief @12% | After the Relief@10% | Before the Relief @12% | After the Relief@10% | |
| Basic Wage | 50,000 | 50,000 | 50,000 | 50,000 |
| Add: Employer’s differential contri. (12%-10%)* | – | – | – | 1,000 |
| Less: Employee’s Contribution | (6,000) | (5,000) | (6,000) | (5,000) |
| Net Employee’s Take Home Wages | 44,000 | 45,000 | 44,000 | 46,000 |
| Employer’s Contribution to PF @ 12%/10% | 6,000 | 5,000 | 6,000 | 5,000 |
Example II – Employee opt to contribute at 12% and Employer Contribute at statutory rate of 10%
| Salary Component | Non CTC Model | CTC Model | |||
| Before the Relief @12% | After the Relief@10% | Before the Relief @12% | After the Relief@10% | ||
| Basic Wage | 50,000 | 50,000 | 50,000 | 50,000 | |
| Add: Employer’s Differential Share (12%-10%) | – | – | – | 1,000 | |
| Less: Employee’s Contribution | (6,000) | (6,000) | (6,000) | (6,000) | |
| Net Employee’s Take Home Wages | 44,000 | 44,000 | 44,000 | 45,000 | |
| Employer’s Contribution to PF | 6,000 | 5,000 | 6,000 | 5,000 | |
Example III – Both employer and employee contribute at the rate 12%.
In this case the monthly outflow for employer and monthly take home salary for employee will be same as was paid before introduction of the relief.
In above cases, in example I and II in CTC model the employer is required to pay differential PF liability of 2% (original contribution of 12% minus revised contribution of 10%) to the employee as part of payroll and it will further increase the liquidity of the employee. However it is important to note here is that the employer’s differential contribution will be subject to tax under the provisions of The Income Tax Act, 1961 in the hands of the employee.
In example II above an employee under Section 6 of the Provident Fund Act, has an option to contribute in excess of statutory rate subject to the condition that the employer is not obliged to pay contribution above the requirement of EPF & MP Act.
We hope that the above analysis of the amendment in PF rates will bring more clarity to the user and will be helpful for processing their respective payrolls for the months of May, June and July.
