Before we Begin: Employee Provident Fund or PF in short is a retirement benefit that is provided to all individuals who work as salaried employees of organizations across india. A % of their basic salary is usually deducted as provident fund and remitted against their PF Accounts. An equivalent contribution is done by the employer as well. This money earns an interest and is given to the employee at the time of retirement as a bulk settlement.
The Employees Provident Fund Organization (EPFO) has come up with a new ruling that could potentially spell “BAD” news for almost everyone who would read it. I personally would consider that a blessing in disguise but the fact of the matter is, in the immediate future, it would definitely be considered as Bad News.
So, what is this news?
The EPFO has decided that:
The PF contribution of an employee will now be deducted not just on his/her basic salary but on their gross income.
Is this BAD News?
In the Immediate Future - Of course, YES. I will explain the Good News part shortly. For now, lets find out how this is bad news.
Let us say your monthly salary is split up as follows:
Basic Salary: Rs. 25,000/- p.m
Other Allowances: Rs. 10,000/- p.m
Net Monthly Salary: Rs. 35,000/-
Current PF Amount (Contribution by both Employee + Employer): Rs. 6,000/- (3,000 + 3,000)
Proposed PF Amount: Rs. 8,400/- (4,200 + 4,200)
Difference: Rs. 2,400/- per month additional contribution to the Employee Provident Fund Account.
What Exactly is the Bad News here?
Most Organizations in india currently offer salary on a CTC (Cost To Company) basis wherein they fix a total salary per year that is inclusive of all components like Basic Salary, House Rent Allowance, PF, Gratuity etc. So, this additional PF contribution will obviously get deducted from your monthly salary.
If the above calculation was for someone on CTC it would mean:
Salary: Rs. 35,000/- p.m
Old Take Home Salary: Rs. 29,000/- p.m (After deducting old PF amount of Rs. 6,000/-)
New Take Home Salary: Rs. 26,600/- p.m (After deducting new PF amount of Rs. 8,400/-)
Effectively your Take Home Salary has come down by Rs. 2,400/- and this is Bad News Right???
Is there any Good News here?
Actually YES. I am pretty sure most of you who are on CTC type salaries will disagree but the fact is, there is a significant good news.
Good News No. 1:
If you are not on CTC and the employer side PF and other Retirement Benefits are over & above your salary (like Government Employees) then your total Gross Salary is effectively being hiked. Look at the non CTC calculation for the same individual below:
Salary: Rs. 35,000/- p.m
Old Net Salary: Rs. 38,000/- (Including Employer PF contribution = Rs. 3000/-)
Old Take Home: Rs. 32,000/- p.m (After deducting Employee PF Contribution)
New Net Salary: Rs. 39,200/- (Including Employer PF Contribution = Rs. 4,200/-)
New Take Home Salary: Rs. 30,800/ p.m (After deducting Employee PF Contribution)
As you can see, though your take home salary has come down by Rs. 1,200/- your total salary has gone up by the same amount because your employer too is being forced to shell out his part of the contribution and hence your net effective salary is UP.
Good News No. 2:
As the PF is going to be calculated on your total gross salary, your PF contribution every month is going to be significantly higher than what it was earlier. Though you will feel a small pinch in monthly cash flow due to the lower take home salary, you will definitely retire rich.
Let us take the same example where Rs. 6,000/- was contributed as PF every month. So, in one year you will accumulate Rs. 72,000/- per year in your PF Corpus as per the old calculation. However, as per the new calculation you will be accumulating Rs. 1,00,800/- which is a significant increase. If you consider the fact that, this will continue for the next 20 or 30 years that you work, your retirement corpus will be a whole lot bigger when you retire.
So, in the long run, this is definitely GOOD NEWS.
Some Last Words:
As of now, there is not much clarity on what all components of a persons CTC Salary would be considered for this PF Calculation. There is also speculation that there is an upper limit of Rs. 6,500/- per month as the amount considered as Salary for calculation of PF for both employer and employee contribution. However, here again there is not much clarity on this as to whether this limit will be enforced.
Anyways, in the next few weeks/months we should get that information as well. The moment the info is released to the public, you can expect the same to be covered here – like always!!!