Govt bets on slashing employee EPFO contribution to spur take-home salary, raise consumption

Employee contribution in certain sectors to be cut by 2-3%

epfo The Employee Provident Fund Organisation (EPFO) is the statutory body that manages the provident fund | Shutterstock

In an attempt to boost consumption, the Centre is planning to reduce the employee PF contribution to EPFO so that the take-home salary increases and people have more cash to spend. The provisions, part of the Social Security Code Bill, 2019, which has been approved by the cabinet and expected to be tabled in Parliament this week, will allow employees in select organised sector to pay less than the current 12 per cent statutory contribution. However, the employer contribution will remain at 12 per cent.

The employee contribution may vary between 9-12 per cent, depending on the sector. The rules may not be universal for all sectors and government may allow this in certain sector like MSME, textile, and start up firms, as per two government officials familiar with the development who spoke to the Livemint on condition of anonymity.

While the flexible structure will allow employees to take home a better pay, the side effect of this move will lower the retirement saving corpus of workers in the long run. Currently, both employee and employer contribute 12 per cent each of the basic salary every month. 

Plans to reduce the employee contribution were on cards for a quite some time, but the proposals might see a lagislative push with the Social Security Code Bill to be placed in the current session of Parliament. 

The labour ministry has also scrapped the option for Employees Fund Provident Organisation (EPFO) subscribers to switch to the National Pension System (NPS), the Employee Pension Scheme, reported The Economic Times. 

Consumption in the country has been falling, dragging down growth to more than a six-year low of 4.5 per cent in the September quarter. According to a recent report by the RBI, the consumer confidence in the country was at a five-year low. In addition, a yet-to-be released survey by the National Statistical Office (NSO) revealed that consumer spending in India fell for the first time in more than four decades in 2017-18.