Economic Survey 2016 wants employee contribution to EPF be made optional

Will Budget 2016 bring changes in the compulsory employee contribution to EPF?

If the finance minister takes the Economic Survey 2016 suggestions seriously then there may be changes in the compulsory employee contribution to EPF on the anvil. The survey has suggested that employees could be allowed to choose whether or not to save 12 per cent of their salary into EPF or keep it as take home pay.

The survey has suggested that the function of EPFO (Employees Provident Fund Organization) be improved. Policymakers should consider whether lower earners should be offered the same choice- of whether to contribute part of their salaries to the EPF- which the rich have. This would both introduce competition in the market for savings, which may improve EPFO's service standards, and allow the poor-some of whom may be liquidity constrained- to optimize as per their own personal requirements, says the survey. To be clear, the employer's 12 per cent contribution to EPF/EPS would be unaffected. The only difference would be that employees could choose whether or not to save 12 per cent of their salary into EPF or keep it as take home pay. Such a change would effectively reduce the tax on formal sector labour while leaving informal sector labour costs unchanged. In a relative sense, it would therefore reduce the cost of hiring workers in the formal sector and incentivize more people into formality, where productivity levels and growth are higher.

To boost economy the centre has to ensure that labour regulation is worker-centric, by expanding workers choice and reducing mandatory taxes on formal sector employment, says the survey.