India Inc. asks Labour Ministry to make PF optional

Firms want employees to have a choice on how they are paid their salary…

A consortium of 500 companies has approached the Union Ministry of Labour to change laws regarding payment of salary to low-wage employees.

Currently, companies are required, by the law, to deduct some part of an employee’s salary towards Provident Fund (PF) and Employees State Insurance (ESI). The consortium wants the Government to change the rules so that the employee is able to choose the deductions to be made from his salary.

According to HR consultancy firm, TeamLease, “Indian employees do not have a choice on how their salaries are paid, as a part of it is to be paid compulsorily towards PF and in the case of low-wage earners, ESI.”

The consortium has asked the Government for three changes with regard to payments. 

First, it has asked for PF deductions to be made optional and for employees to have a right to opt out of it. 

Second, the employee should be allowed to invest his 12 per cent PF contribution either in the Employee Pension Scheme or in an individual account in the National Pension Scheme. 

Third, an employee must be free to choose to pay his insurance deductions either to ESI Corporation or to any insurance agency approved by the Insurance Regulatory and Development Authority (IRDA).

The reasons for these demands is that in a cost-to-company model, while the informal employees can take home their entire salary, those working in the formal sector take home only part of their salary due to deductions towards PF, ESI, professional tax, Employees Pension Scheme, statutory bonus and gratuity. As a result, most low-wage earners choose to work in the informal sector.

Salary deductions in India are one of the highest in the world, especially for the low-wage employees. If calculated on the basis of cost-to-company (CTC), salary deduction for them is as high as around 45 per cent. On the other hand, for those in the high-salary bracket, the figure stands at a mere 5 per cent (approx.). 

Industry experts are of the opinion that more people will prefer to join the formal sector if they are allowed to choose their deductions, as they will be able to take home a better pay, even though the CTC may remain the same.