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Planning For It!

Change in Employee Provident Fund Rules – Things you need to know

The EPFO has made recent amendments to the way in which employee and employer contribution would be calculated hereon. For employees, this amendment is particularly important as it impacts his/her take home salary and income tax liability as well.

A quick look at the amendment: Change in Salary definition – Previously, the term ‘salary’ for computing EPF contribution included basic + DA (dearness allowance). As per the new rules, ‘salary’ will include basic + DA + allowances that are ordinarily, necessarily and uniformly paid to employees. Example: Suppose your monthly salary particulars are as follows: Basic: INR 30,000 p.m. Conveyance allowance: INR 5,000 p.m. Medical allowance: INR 5,000 p.m. As per previous EPF rules, an amount of 12% on Basic (Rs.30,000), i.e. INR 3,600 was the employee’s contribution. As per the new rules, an amount of 12% on Basic + Allowances (Rs.40,000), i.e. INR 4,800 would form the employee’s contribution.

What this means to you:

• Contribution to the EPF will increase on the part of both the employer and the employee. This will happen as the base for the calculation is larger than before. For the employee this will mean a larger contribution in the EPF account each month which will mean a larger amount of earnings in the form of interest.

• Larger contribution means higher savings but lower take-home salary if the employer decides not to absorb this rise.

• If the employer decides to absorb this rise then it will in effect be a salary hike for the individual to the extent of the extra amount contributed to the provident fund by the employer.

Published Dec 13 2012

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