EPFO monthly contribution to be reduced to stimulate Net salary

The net salary of employees in the organised sector may increase slightly as the union government seeks to allow selected sectors to reduce monthly statutory deductions on behalf of the Employees Provident Fund (EPF).

But, the side effect of this measure will reduce the long-term workers' retirement savings corpus.

The rule change, which will be part of the 2019 Social Security Code bill, which will be presented in Parliament this week, may allow employees to pay less than the current legal contribution of 12%. In contrast, the employer's contribution will remain unchanged at 12%.

At present, both employees and employers of a formal sector establishment contribute 12% of each basic salary every month. For all sectors, the rules may not be universal, and the government may allow this in specific industries such as MSMEs, textiles and start-up companies, according to two government officials familiar with the development who spoke on condition of privacy.

The first official said, "The employee share of EPFO contribution may vary between 9% and 12%, depending on sectors. The flexibility will help workers to take home a better salary."

The plan has been presented for the past five years, but with the social security code bill ready to be tabled in Parliament, the central government has decided on it.

But change cannot be seen as a movement to stimulate domestic consumption in a downturn economic scenario. The annual accumulations of EPFO due to the legal contribution of the employee and the employer are of the sum of Rs. 1.3 trillion per year. And, reducing employee contribution by two or three percentage points in some sectors will lead to less than Rs 3,000 crore per year growth in spending. There is very little to boost consumption at a time when GDP has slowed to a six-year low.