EFF for women employees capped at 8%, but tax liability goes up

The government has capped EPF contribution for new women workers at 8 per cent of their salary, thereby allowing for an increase in their take-home salary, but at the cost of an increase in tax liability.

Presenting the Union Budget 2018, finance minister Arun Jaitley proposed to make amendments in the Employees Provident Fund and Miscellaneous Provisions Act, 1952 to reduce women employees' contribution to 8 per cent for first three years of their employment against existing rate of 12 per cent or 10 per cent with no change in employers' contribution.

''To incentivise employment of more women in the formal sector and to enable higher take-home wages, I propose to make amendments in the Employees Provident Fund and Miscellaneous Provision Act 1952, to reduce women employees' contribution to 8 per cent for first three years of their employment against existing existing rate of 12 per cent or 10 per cent with no change in employers' contribution,'' Jaitley said in his budget speech.

This means that the take home salary of women employees having salary of Rs10,00,000 per annum will increase by Rs40,000 per annum due to reduced contribution to provident fund (ie 12 per cent – 8 per cent = 4 per cent of Rs 10,00,000). But the women employee will have a lower amount available for deduction under section 80C due to lower contribution to provident fund, resulting in an increase in their tax liability by Rs9,205, which is 23.01 per cent of Rs40,000.

Since the increased take home salary comes out of the reduction in the investment in provident fund from 12 per cent to 8 per cent it amounts to a lower deduction under section 80C.

Employees contribution to provident fund as well as some other savings are eligible for deduction under section 80C and an employee can save tax on the contributions made up to a maximum of Rs1,50,000 per year under that count.

Under the retirement benefit scheme run by the Employees' Provident Fund Organisation (EPFO), the employees contribute 12 per cent of their basic wages which goes into their EPF account.

Employers also make a matching contribution of 12.5 per cent out of which 8.33 per cent goes into Employees Pension Scheme and 3.67 per cent is deposited into employees' EPF account. The employer also pays 0.5 per cent of basic wages towards Employees' Deposit Linked Insurance Scheme.

The EPF account fetches an interest of 8.65 per cent for the subscriber at current rate, which was lowered during the last fiscal, from the previous 8.8 per cent in 2015-16.