The EPF reduction means you will pay tax on cash from your retirement fund

• Finance Minister Nirmala Sitharaman announced a reduction in Employees’ Provident Fund (EPF) from 12% to 10% for the next three months.
  
• This will directly impact nearly 4.3 crore employees as their take-home salaries will increase.
  
• For employees, even though cash-in-hand may increase — it will be taxed. This will, in turn, help the government with tax revenues.

Finance Minister Nirmala Sitharaman announced a reduction in Employee Provident Fund (EPF) contributions for the next three months. While take-home salaries will increase, the additional amount received will be taxable as per existing slabs.

If the same money were to be left in the EPF, and withdrawn at the time of retirement, you wouldn’t have to pay tax on it.

How much will my take-home increase due to the EPF deduction?

Earlier, 24% of the net pay was going into EPF. And, now 20% will go — 10% from employers, 10% from the employee. The employer may choose to continue with the old contribution but it is less likely.

For instance, an employee with basic pay of ₹100,000, the amount deposited into EPF will fall ₹4,000. So you will get ₹4,000 more as take-home salary and that will be taxed at ₹1,200 per month (assuming you fall under 30% tax slab). The annual tax paid will be ₹14,400.

Similarly, those with basic pay of ₹50,000, the reduction will amount to ₹2,000 per month. The monthly tax increase will be ₹200 a month (assuming a tax rate of 10%). The tax increase for the entire year will be ₹2,400.

How is the government making money by reducing my EPF?

The government will make money on two counts, and the additional tax is only one of them.

“These measures reduce the interest burden for the government,” said Archit Gupta, Founder and CEO of ClearTax. That is because there will be less money deposited into EPF after this announcement.

As the Finance Minister pointed out on May 13, she expects nearly 4.3 crore employees to avail the EPF reduction and increase the take-home salary. The sum of all these reductions can be a significant benefit for the government.

What the government loses in this process is the opportunity to invest more EPF money in assets like equities or bonds for higher returns. “They have very limited equity exposure. So, they’re not able to afford the kind of returns that they’ve been giving,” Gupta said. The uncertainty in the post COVID-19 economy has reduced the investment opportunities further.

See also:
Take-home salaries for employees will increase as Finance Minister Nirmala Sitharaman reduces provident fund deduction

Reminder⁠ — You have time till June 30 to make tax-saving investments for the last financial year