The government is planning to bring in new rules under which it will give employees an option of reducing their contributions for creating their retirement fund. At present it is mandatory for an employee to contribute 12 per cent of his or her basic salary for building Employees Provident Fund (EPF) corpus. The employer also contributes 12 per cent of the employee’s salary towards EPF. In a candid interview with Ashfaque Ismail, Suresh Sadagopan, Founder, Ladder7 Financial Advisories, explains how lower EPF contributions will increase employees’ tax outgo. Edited excerpts:
What is the basic purpose of having EPF contributions?
Employees Provident Fund (EPF) is one of the ways to build a corpus over one’s lifetime to fund the retirement period. Since the period of one's employment is a long one, the potential to accumulate a very sizable corpus is real. There is a matching contribution of 12 per cent of basic income + dearness allowance (DA) from the employers too, throughout the period, which helps in accumulating a good corpus. Employees do have access to it for specific purposes under certain conditions. While the flexibility is given, it is in their best interest to not dip into the EPF corpus for various purposes and leave it alone to fund their retirement needs.
In what way EPF contributions help employees? Do they help them fulfill their rainy day needs?
Left on their own, many people will spend most of what they earn. Whatever gets saved also gets utilised for short-term needs and goals. Retirement seems so long away that for most people it does not even come up as a goal till they are in their mid-forties! While contributing the sums into their EPF accounts, they don't even realise it. But, it accumulates unobtrusively and compounds over a long period. The interest earned are tax-free and hence the compounding is even better. At the end of the tenure when one gets the corpus back, it is again tax-free making it a very unique vehicle where the contributions are exempt from tax, interest earned are exempt from tax and the final corpus is also tax-free.
EPF is very important as it offers security in retirement. This is a stage of life that should be worry-free and one should be able to spend time happily rather than be concerned about their finances. For most goals one may be able to take a loan; but retirement is not one of them! If one has not done the appropriate savings for retirement, one will have to be dependent on their children during this period. This is not something that anyone would want. Hence, it is best to be wise and keep aside a decent corpus for the retirement phase.
Is the government decision bad for the employees? If yes then in what way?
The proximate cause to allow people to contribute less into EPF is to put some more money in their hands to boost spending and kick start the economy. But, this will have long term implications in terms of having a good retirement fund, enough to take care of their life after retirement.
This is a bad decision. The amounts going in are fine as of now. Even today, people can access this corpus for multiple needs they may have - like children's education, marriage, building a home, buying vehicles, medical emergencies etc. Ironically many people do tap into the EPF corpus for some of these requirements and their EPF corpus is very much depleted. Now reducing the contribution is another blow.
Employees' take-home salary will go up? Is it good or bad? In what way?
It is probably good in the short term. They may spend the extra amount there by boosting consumption in economy marginally and work well in the short term. But, this vitamin shot to the economy may be the albatross around the neck for the government as it may drive many more people to old age destitution and state dependency.
From taxation point of view, will the decision increase employees' tax outgo? Please elaborate if yes.
If the employees contribute less money into their kitty their taxable income will increase and their tax outgo will go up.
How companies will be affected from this decision?
Companies will not be monetarily affected by this decision as this is about employee receiving some portion in their hands of what they would have contributed to EPF. But when employee welfare is impacted, companies will also face the heat over time and may have to step in. In such a scenarios even they may be impacted overtime.