MUMBAI: Take-home salaries of employees would increase with the governmentâs move to reduce the statutory employee provident fund (PF) contribution from 12% to 10% for three months. However, this would come at the cost of a reduction in the individualâs PF account, which is widely considered as a social security benefit.
The move would also provide relief to employers at a time when liquidity is a constraint. However, that would depend on how salaries have been structured by an organisation. If the PF contribution is part of cost to company (CTC) of an employeeâs salary, the employer may have to pass on the benefit to the employee.
According to the standard structure, if the basic salary of an employee is Rs 100, 12% or Rs 12 gets deducted as PF. An equivalent amount is contributed by the employer into the employeeâs PF account, taking the total monthly contribution to Rs 24.
With the government reducing the PF contribution to 10% â both for the employee as well as the employer â the amount that would accumulate as PF every month in an employeeâs account would be Rs 20. In case the salary is structured such that the employerâs contribution is over and above the CTC, then the employer may also benefit from the move.
Motilal Oswal Financial Services executive director & head (HR) Sudhir Dhar said, âOur employeesâ take-home salary will increase. However, the employees may have to bear the tax on that amount, although it wonât be much.â
Nishith Desai Associates head HR laws (employment & labour) Vikram Shroff said, âWe will await the specific notification to determine if the 2% of the employerâs monthly PF contribution can be retained or whether it needs to be passed on to employees as additional compensation. Legally, it would also depend on the terms of individual employment contract along with the employeeâs CTC structure, which will need to be reviewed for making such determination.â
For organisations with a larger base of employees, and contributing to PF over and above CTC, this could result in a greater relief. When asked to quantify the difference the measure would make on businesses, Aditya Birla Group head (HR) Santrupt Misra said, âIt is not a question of a large or small impact from individual items. One has to look at the potential collective impact. The objective is to put more money back in the hands of people to stimulate economic activity including demand. I am sure the PF contribution rate cut would be a contributor in the process. At this point, any support for the right reasons should be welcome.â
Cyril Amarchand Mangaldas partner Rashmi Pradeep said, âThe decision will reduce the burden on employers and put more money in the hands of the employees, at least for the next 3 months.â