Increasing your take-home pay by reducing PF contribution may not be ideal. Know why
New Delhi: With the cost of living going up, everyone wishes their take-home pay was a little higher. Well, soon the government may give you the option to increase your take-home salary by decreasing your Employees Provident Fund contribution.
A recent financial daily report stated that that the government is planning to give salaried employees the option of reducing their EPF contribution percentage which is currently pegged at 12 per cent of the basic salary. Labour ministry officials were quoted in the report saying that this provision is part of the Social Security Code Bill, 2019, approved by the Cabinet and is expected to be tabled in Parliament this week.
The Bill, however, retains employers’ PF contribution at 12 per cent of Basic. Details on how low employees’ PF contribution can be brought down, will be worked out after the passage of the Bill. While increasing your take-home pay is good news definitely, what with the prices of everything on the rise and your salary not going up at a similar rate. But, is it really good to get more money in hand now than later?
Note that EPF is a means to save for your retirement. In fact, it is a sort of forced savings. The government rationale for allowing lower employee PF contribution might be that higher take-home pay may boost consumption, which has been falling, dragging growth down. However, according to investment experts and financial planners, this is just a short term solution that will have far-reaching implications for the employees.
Here’s why you should not opt for a lower PF contribution even if you have the choice:
It has been advised time and again to not put all your eggs in one basket. EPF should not be the only investment avenue you use to save for retirement as it might not give you enough to sustain your lifestyle after retirement. However, for many in the Indian workforce, it is the only safe, tax-efficient financial product they use.
For a lot of people, investment vehicles like the EPF and gratuity, are probably their only means for savings retirement and reducing the EPF contribution of employees will mean that forced savings will be missed which, in turn, will lead to them not having enough retirement corpus amount.
Surya Bhatia, managing partner of Asset Managers was quoted in an ET report saying, “I do not think this is a good move. The EPF is a safe, tax-efficient savings instrument. If you give someone the option to go for lower EPF contribution which leads to higher take-home pay, they will most probably opt for it. And with all likelihood that money will be spent instead of being invested. EPF is something that you can use to save blindly, this is why giving the option to reduce the provident fund contribution should not be given.”
Note that financial planners always advise against withdrawing your corpus even while changing jobs, instead people are told they should transfer it. Also, even though there are options to withdraw the EPF corpus for instances like repaying a home loan or a daughter’s wedding, it is advised to be used as the last resort. So, in the case of opting for lowering EPF contribution, the advice remains that it should not be done.
It is to be mentioned that EPF contribution qualifies for tax benefit under section 80C of the Income-tax Act. If the proposal goes through, lesser contributions will mean much less tax benefit. For example, if annual PF contribution falls by Rs 7,200, then for someone paying 31.2 per cent tax (highest slab), you will save around Rs 2,250 lesser tax.
Also, any reduction in the contributions made towards EPF by the employee will also see a reduction in the overall corpus invested. For example, for someone who is 30 years old and will retire at the age of 60, who is earning a basic salary of Rs 30,000 a month, if the contribution rate is reduced from 12 per cent to say 10 per cent, the retirement corpus will fall by up to 16 lakh from Rs 92 lakh to Rs 76 lakh by the time he retires.
According to experts, there is no sense behind taking out money from a safe, tax-free savings option that will give you a return of 8.65 per cent.