Summary
- Your net take home salary might be reduced.
- Your provident fund and gratuity components are set to rise
- Paying more than 40% of your take-home salary as loan EMI?
After the implementation of the new
wage code companies will have to restructure pay packages of employees
following which their take-home salary will reduce
New Delhi: From April 2021,
take-home salary of private sector employees is set to fall as companies need
to restructure pay packages of employees as per the new wage rules. The
government has notified the draft rules under the Code on Wages 2019. As per
the new compensation rules, allowances can not be more than 50% of the total
compensation. It means, that the basic pay (in government jobs, basic pay plus
dearness allowance) will have to be 50% or more of total pay from April.
Typically, most of the companies keep
the non-allowance part of employee's pay package at less than 50% to reduce
their EPF and gratuity liability. But after the implementation of the new wage
code, companies will have to increase the basic pay of employees to meet the
new requirement. The revision will result in reduction in take-home pay as
provident fund (PF) contribution of most of the employees will go up. Employees
are required to contribute 12% of their basis pay to PF while employer’s
contribution to EPF is either 10% or 12%.
"Tough the new wage code will
reduce take-home salary of employees, their social security kitty as well as
post-retirement gratuity amount will be bigger as gratuity is also calculated
on the basis of basic pay, which will go up," said Balwant Jain, chief
editor of Apnapaisa.com. "However, the good thing is that your tax
liability will also reduce as employers typically include their contribution to
the employees' PF in their Cost-To-Company (CTC)," Jain added.
Despite the reduction in tax
liability, the overall impact on take-home salary of employees will be negative
and it will pinch the most to the employees in the lower income bracket as they
are typically left with less surplus after providing for their monthly expenses
and loan EMI if any. The situation will be more difficult for people servicing
home loan along with a car loan or personal loan. For these people their EMI
liability is generally more than 40% of their take-home salary. So even a 10%
reduction in take-home salary will pinch them the most.
To understand this let us consider an
example. Suppose your gross salary is Rs 1 lakh at present and your basic
salary is Rs 40,000. Your total PF contribution (including employer's
contribution) is Rs 4,800 & Gratuity is Rs 1,924. So your pre-tax take home
salary comes to Rs 88, 476 (assuming no other deduction is their).
Once the new code becomes applicable
your basic pay needs to be revised to Rs 50,000. So your monthly PF
contribution (including employer's contribution) will increase to Rs 12,000
& Gratuity is Rs 2,405, 125% higher than your existing contribution. Hence
your pre-tax take-home salary will fall to Rs 85,595, nearly 3.5% less than
your existing pre-tax take-home salary.
In such a case you have two options
either to reduce your expenses or cut down on your monthly contribution
to SIPs or PPF or NPS. It is obvious to get tempted to stop existing SIPs,
which are for long term purpose. But as per investment experts, in such a
case, one should not stop SIPs in equity funds as their portfolio will be
debt heavy (24% of your income will be going to PF, which is a debt investment)
rather they should reduce PPF or NPS contribution depending on their tax
liability.
"Tough the new wage code will
reduce take-home salary of employees, their social security kitty as well as
post-retirement gratuity amount will be bigger as gratuity is also calculated
on the basis of basic pay, which will go up," said Balwant Jain, chief
editor of Apnapaisa.com. "However, the good thing is that your tax
liability will also reduce as employers typically include their contribution to
the employees' PF in their Cost-To-Company (CTC)," Jain added.
Despite the reduction in tax
liability, the overall impact on take-home salary of employees will be negative
and it will pinch the most to the employees in the lower income bracket as they
are typically left with less surplus after providing for their monthly expenses
and loan EMI if any. The situation will be more difficult for people servicing
home loan along with a car loan or personal loan. For these people their EMI
liability is generally more than 40% of their take-home salary. So even a 10%
reduction in take-home salary will pinch them the most.
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