The cut in the contribution rate to the Employees’ Provident Fund (EPF) from 12 per cent to 10 per cent (of Basic and Dearness Allowance) is a mixed blessing for employees.

On the positive side, employees’ take-home pay will increase, given that they will have to contribute less to the EPF. But the flipside is, the cost-to-company (CTC) that employers incur on employees will fall. Also, the retirement corpus of employees will be hit. Here’s how.

Currently, both employees and employers have to contribute 12 per cent of Basic pay and Dearness Allowance (DA) to the employee’s provident fund account. So, 24 per cent of your Basic and DA is being contributed each month towards your retirement kitty.

Assume your salary is ₹200 comprising Basic and DA of ₹100, and other allowances of ₹100. So, each month, you contribute ₹12 (12 per cent of Basic and DA of ₹100 ) to your EPF account, and your employer also makes an equal contribution (₹12).

So, you get to take home ₹188 (₹200 less your contribution of ₹12), while your retirement corpus is filled with ₹24 (total of your and employer contribution of ₹12 each). Note that your employer would be accounting for his contribution to your EPF account as part of your cost-to-company (CTC).

Now, the Centre as part of the economic package to tackle the Covid-19 crisis has reduced the EPF contribution rate to 10 per cent from 12 per cent for both employees and employers. This is applicable for a period of three months to all establishments under the Employees’ Provident Fund Organisation (EPFO).

For employees of Central and State governments though, the governments as employers will continue to pay 12 per cent towards EPF contribution, while employees will have to pay only 10 per cent. Also, for those organisations for whom the Centre had picked the tab for paying EPF contributions on behalf of both employers and employees in the earlier economic package, the benefit will now continue for an additional three months until August 2020 – at the rate of 12 per cent.

In the case of establishments where the EPF contribution rate has now been reduced from 12 per cent to 10 per cent, there will be an increase in the take-home pay. So, in the above example, your take-home pay will increase to ₹190 (₹200 less ₹10) from the earlier ₹188 (₹200 less ₹12).

At the same time, your employer will also be contributing only ₹10 to your EPF account instead of the earlier ₹12. That will reduce the CTC that your employer incurs on you. This will improve the employer’s cash flows but will be a negative for employees.

How, when and whether employers will have to make up the loss to employees for the three months that this facility is available is unclear at this point of time.

Besides, note that both your contribution and your employer’s contribution to the EPF goes into building your retirement kitty in the long term. This will take a hit now, even if temporarily.

So, in the above example, instead of ₹24 (₹12 plus ₹12) going into the EPF each month, now only ₹20 (₹10 plus ₹10) will go into the EPF for three months. Employees can, if they wish to and can afford to, make up for this by contributing the deficit ₹2 through the voluntary provident fund (VPF). But the deficit in the employer’s contribution for the three months cannot be made up.

Also, many employees consider their contribution to the EPF as part of their Section 80C tax break of ₹1.5 lakh a year. With a fall in their contribution to the EPF for three months, such employees may have to look at other avenues to make up the shortfall, if any.