The Employees' Provident Fund Organisation ( EPFO) recently introduced and withdrew a circular, which could have had a huge impact on a salaried individual's PF savings.
The circular sought a change in the definition of 'basic wage' so as to include all payments except the specified exclusions. This meant that all allowances that are necessarily and uniformly paid to the employees were to be treated as part of basic wages.
Since 12 per cent of the basic wage is currently contributed by both the employer and employee towards the Employee Provident Fund, the circular could have effectively altered the finances of a salaried person.
ET asked industry experts whether a mandatory increase in contribution would really benefit the employees. Here's what they had to say.
The circular sought a change in the definition of 'basic wage' so as to include all payments except the specified exclusions. This meant that all allowances that are necessarily and uniformly paid to the employees were to be treated as part of basic wages.
Since 12 per cent of the basic wage is currently contributed by both the employer and employee towards the Employee Provident Fund, the circular could have effectively altered the finances of a salaried person.
ET asked industry experts whether a mandatory increase in contribution would really benefit the employees. Here's what they had to say.
Amitava Ghosh, Senior VP & Head, Regulatory, TeamLease Services Opinion: May be
The mandatory increase in contribution could have a mixed effect on
employees in different pay slabs. For instance, those with a monthly PF
salary in the range of Rs 6,500 would take lesser cash home. They would
not want a deduction on the maximum component of wages considering the
steep rise in cost of living. Hence, a higher PF deduction would push
the lion's share of salaried employees towards significant stress. In
fact, the new rule would also adversely affect the contractual
employees, whose term is typically a year, causing them to lose their
provident fund due to failure on their part to track each service break
and submit withdrawal forms to the authorities.
The employees belonging to the middle, upper middle or higher middle level, where pay packets fall in the taxable income bracket, could be happy to have their contribution (at a flat rate) being converted to deposit, rather than giving it away to the government as income tax. They have the alternative of Voluntary Provident Fund, which offers another option to save in the PF, whether it is tax exempt or not. In such a case, the deduction on higher pay may or may not result in extra benefits.
However, the employees in the minimum wage or 'fair wage' group would have to face a big cut in their net salaries if certain allowances are considered for PF deduction. Besides, the chance of a strong opposition to the move from employees' association could not be ruled out, even though it would ensure a forced deposit in the PF. Since employees in the minimum wage group prefer living from day to day instead of stocking up for the future, it could prove to be a bottleneck and mire the entire effort.
The employees belonging to the middle, upper middle or higher middle level, where pay packets fall in the taxable income bracket, could be happy to have their contribution (at a flat rate) being converted to deposit, rather than giving it away to the government as income tax. They have the alternative of Voluntary Provident Fund, which offers another option to save in the PF, whether it is tax exempt or not. In such a case, the deduction on higher pay may or may not result in extra benefits.
However, the employees in the minimum wage or 'fair wage' group would have to face a big cut in their net salaries if certain allowances are considered for PF deduction. Besides, the chance of a strong opposition to the move from employees' association could not be ruled out, even though it would ensure a forced deposit in the PF. Since employees in the minimum wage group prefer living from day to day instead of stocking up for the future, it could prove to be a bottleneck and mire the entire effort.
Bhuvana Shreeram, Head, Member Success Team, Ffreedom Financial Planners Opinion : No
Would the move hurt? Yes. Since the take-home salary would be lesser, it would obviously hurt. With salary hikes not really mirroring inflation, the new PF norms would adversely impact the majority of middle-income salaried individuals.
As for the employees who contribute to a retirement plan over and above the EPF, they wouldn't have to worry about more money going into conservative, fixed return investments, which may not protect them against inflation. Why dictate where the money is to be invested? Why not let informed individuals make their own decisions on how to ensure safe retirement?
However, this mandatory deduction could also be a good step. A lot of us lack the discipline to invest regularly for long-term goals such as retirement. The problem is not that the investments may not give the highest returns, but sticking to a disciplined investment plan in the first place. Any kind of forced saving is good. Remember, if employee contribution goes up so will that of the employers. This, in the long run, can be highly beneficial since the EPF has a chance to mature with a meaningful corpus at the time of retirement.
What's the alternative to this move? The NPS is a well-designed initiative for retirement planning. If the tax treatment differences are ironed out and if the employees could be given the option of investing this compulsory contribution in the NPS and/or the EPF in a way that they are comfortable with, it would be most welcome.
Kuldip Kumar,Executive Director, Tax & Regulatory Services , PwC India: No
The Provident Fund is an important retirement benefit for the salaried class and it also offers tax saving. Currently, an employee has to contribute 12% of the basic wages and the employer matches this contribution. The recent circular would have meant that the employees would have to contribute more when they received an allowance, reducing their take-home pay. Most of the private companies hire staff based on 'cost to the company'. If the employer's contribution were to be factored into the total compensation, it would dent the take-home salary further.
The employees could benefit in tax as the employer's contribution is not taxable. This would be applicable if the tax authorities considered the contribution on allowances as part of contribution on basic wages only, or if appropriate changes were to be made in the tax laws.
The interest on PF balance is tax-free, which is another redeeming factor. However the move could adversely impact employees' household budgets, especially if they have EMI commitments for home/car loans. The middle and lower income groups could feel the brunt as a fall in the take-home pay would impact their daily living in the current inflationary environment.
The authorities have put the circular on hold and we need to wait and watch the outcome. The term 'basic wage' has been subject to legal interpretation and there are conflicting verdicts. The final verdict by the Supreme Court on the most recent one involving Montage Enterprises could settle the issue and provide a direction for the PF authorities.
The Provident Fund is an important retirement benefit for the salaried class and it also offers tax saving. Currently, an employee has to contribute 12% of the basic wages and the employer matches this contribution. The recent circular would have meant that the employees would have to contribute more when they received an allowance, reducing their take-home pay. Most of the private companies hire staff based on 'cost to the company'. If the employer's contribution were to be factored into the total compensation, it would dent the take-home salary further.
The employees could benefit in tax as the employer's contribution is not taxable. This would be applicable if the tax authorities considered the contribution on allowances as part of contribution on basic wages only, or if appropriate changes were to be made in the tax laws.
The interest on PF balance is tax-free, which is another redeeming factor. However the move could adversely impact employees' household budgets, especially if they have EMI commitments for home/car loans. The middle and lower income groups could feel the brunt as a fall in the take-home pay would impact their daily living in the current inflationary environment.
The authorities have put the circular on hold and we need to wait and watch the outcome. The term 'basic wage' has been subject to legal interpretation and there are conflicting verdicts. The final verdict by the Supreme Court on the most recent one involving Montage Enterprises could settle the issue and provide a direction for the PF authorities.
Source : The Economic Times, 7 Jan, 2013
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