Employees Provident Fund
The government has proposed an important change in the rules related to Employees’ Provident Fund (EPF), which may increase the monthly salary of employed people, but it may also affect their retirement fund. The government has proposed in the draft Employment-Linked Incentive (ELI) Scheme that if the employees wish, it should be made optional to contribute more than Rs 1,800 to EPF every month. That is, the employees who are currently deducting EPF on the basis of their entire basic salary and dearness allowance (Basic + DA), if they wish, they will be able to take more take-home salary by contributing less.
However, financial experts say that before taking this decision, the long-term impact must be understood, because the extra salary received today can significantly reduce the future retirement fund.
Which employees will be affected?
According to Pensionbazaar head Vishwajit Goyal, this change will not be applicable to all EPF members. This will mainly affect those employees whose EPF is deducted on the basis of their actual basic salary and DA. On the other hand, many companies already collect EPF based on the salary limit of Rs 15,000 set by the government. Such employees contribute only Rs 1,800 every month in EPF, so this proposal will not make much change for them.
If the government approves this proposal, then employees currently depositing more than Rs 1,800 in EPF may get the option to limit it to the minimum level.
How much can take-home salary increase?
If the basic salary of an employee is Rs 30,000, then currently Rs 3,600 is deposited in his EPF every month. On choosing the new option, this contribution can reduce to Rs 1,800, due to which the employee will get an additional Rs 1,800 every month.
Similarly, the current EPF contribution of an employee with a basic salary of Rs 60,000 is Rs 7,200. If he chooses the option of minimum contribution, his take-home salary can increase by around Rs 5,400 per month.
There may be loss of lakhs of rupees in retirement fund
Experts say that the additional amount received every month may seem attractive, but its biggest price may have to be paid at the time of retirement. Less contribution in EPF means that not only will less money be deposited every month, but the compounding benefit of the interest received on it will also reduce.
According to estimates, if an employee with a basic salary of Rs 30,000 deposits Rs 1,800 less in EPF every month, then his retirement fund can reduce by about Rs 10.7 lakh in 20 years and by about Rs 27 lakh in 30 years.
At the same time, if an employee with a basic salary of Rs 60,000 deposits Rs 5,400 less every month, then the fund can be reduced by about Rs 32 lakh in 20 years and about Rs 81 lakh in 30 years. If the salary continues to increase in the future, this loss can become even bigger. Experts believe that an employee who reduces EPF contribution at the age of 30 can lose a potential fund of more than Rs 1 crore by the time of retirement.
What will be the impact on pension and tax?
According to experts, this proposal will not have much impact on the Employees’ Pension Scheme (EPS), because the employer’s contribution to EPS is already fixed on the basis of salary limit of Rs 15,000. This means that the future pension of most of the employees will be secure.
However, if employees opting for the old tax regime reduce their EPF contributions, the tax exemption available under Section 80C may also be reduced. In such a situation, they will have to compensate for the tax savings by investing money in PPF, ELSS, NPS or other eligible investment options.
take decisions carefully
Financial experts say that reducing EPF contribution may be appropriate only for those employees who need extra cash at the moment or who can invest the amount saved every month in a disciplined manner in long-term schemes like PPF, NPS or mutual fund SIP. But for those who consider EPF as their main retirement savings and will not be able to invest the additional amount regularly, continuing to contribute more EPF in the current system is considered a better option.
