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 thetake-home salary of employees in the organised sector to go up slightly as theunion government looks to allow select sectors to cut monthly statutory deductionson account of employees provident fund (EPF).

   

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

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

Currently, both employeesand employers of a formal sector establishment contribute 12% each of the basicsalary every month. The rules may not be universal for all sectors andgovernment may allow this in certain sector like MSME, textile, and start upfirms, as per two government officials familiar with the development who spokeon condition of anonymity.

“The employee shareof EPFO contribution may vary between 9% and 12%, depending on sectors. Theflexibility will help workers to take home a better salary,” the firstofficial said.

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

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

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

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

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