The union government on Wednesday announced reduction of employees’ provident fund (EPF) contribution by both employers and employees to 10 percent of basic wages from the existing 12 percent for the next three months. The government said that the move will place more liquidity in the hands of employees and some relief to the employer as well.

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According to experts, the decision will increase the take-home salary, but at the same time it will reduce investments under section 80(C) for the financial year 2020-21. This means taxpayers will end up paying more taxes with the reduced EPF rate of 10 percent.

"Employee's portion of 2 percent

With the reduction in EPF rates, some taxpayers may have to relook at deductions they want to claim (Section 80C).

"If employees have already planned their investments for the purpose of section 80C after considering expected contribution to EPF, they will require to revisit because in the next three months contribution to EPF will reduce by 2 percent per month of their basic salary plus DA ," explains Gopal Bohra, partner at NA Shah Associates.

Let's understand this with an example:

In the reduced EPF scenario, employees' contribution to PF, which is eligible for deduction under section 80C will reduce by Rs 3,000. This means taxpayers will have to save an additional Rs 3,000 from other eligible investments under Section 80C in case they were were using PF contribution to exhaust the Section 80C deduction limit.

Otherwise the tax liability may go up in case taxpayers are opting for the older tax regime.

Taxpayers can consider hiking the investment amount under any other section 80C investments such as Public Provident Fund or Voluntary Provident Fund, say tax experts.

First Published:May 14, 2020 2:07 PM IST