Government reducing EPF contribution; changing gratuity rule

The government is looking into the option of reducing the provident fund contribution of employees and increasing their take-home amount, according to a report.

This move will make the take-home salary of employees in the organised sector to go up slightly as the union government looks to allow select sectors to cut monthly statutory deductions on account of employees provident fund (EPF).

But, the side effect of this move will lower the retirement saving corpus of workers in the long run.

The change of rules, which will be made part of the Social Security Code bill 2019, to be tabled in Parliament this week, may allow employees to pay less than the current 12% statutory contribution. In contrast the employer contribution will remain at 12%.

Currently, both employees and employers of a formal sector establishment contribute 12% each of the basic salary every month. The rules may not be universal for all sectors and government may allow this in certain sector like MSME, textile, and start up firms, as per two government officials familiar with the development who spoke on condition of anonymity.

“The employee share of EPFO contribution may vary between 9% and 12%, depending on sectors. The flexibility will help workers to take home a better salary,” the first official said.

The plan has been on the table for last five years but with the social security code bill set to be tabled in Parliament, the central government has taken a call on this. But the change cannot be seen as a move to spur domestic consumption in a slowing economic scenario. The EPFO annual accruals due to statutory contribution of employee and employer are to the tune of Rs. 1.3 trillion per annum. And, reducing contribution of employees by two or three percentage points in some sectors will lead to less than Rs. 3,000 crore per annum increase in spending. It’s very little to boost consumption at a time when the GDP has slowed to a six-year low.

The provident fund component is currently 12 per cent of the basic salary. This provision is part of the Social Security Code Bill, 2019 that has been approved by the Cabinet and is expected to be tabled in the Parliament this week.

Reports said that the rationale for reducing the PF contribution is that a higher take-home salary would boost consumption. However, the employer’s PF contribution would remain the same, the bill suggests. The reports quoting officials revealed that the details of the bill will be worked upon after it is passed.

Moreover, the bill also states that fixed-term contract workers would be eligible for gratuity on a pro rata basis. Currently employees who have completed five years in the organisation are only eligible for gratuity as per the Payment of Gratuity Act, 1972.