Pay more than 40% of your take home pay as an EMI loan? New salary code to pinch you the most

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Highlights

  • The government has notified the draft rules of the 2019 Wages Code.
  • In accordance with the new compensation rules, compensation cannot exceed 50% of the total compensation.
  • After the implementation of the new wage code, companies will have to increase the base salary of employees to meet the new requirement.

New Delhi: From April 2021, the take-home pay of private sector employees is expected to decline as companies have to restructure employee salaries in accordance with new pay rules. The government has notified the draft rules under the 2019 Wages Code. According to the new compensation rules, allowances cannot exceed 50% of total compensation. This means that the base salary (in government jobs, base salary plus cost allowance) will have to be 50% or more of the total salary as of April.

Typically, most companies keep the non-indemnity portion of employee compensation below 50% to reduce their liability for EPF and bonus. But after the implementation of the new wage code, companies will have to increase the base salary of employees to meet the new requirement. The revision will result in a reduction in net salary, as the contribution to the Contingency Fund (PF) of most employees will increase. Employees are required to pay 12% of their base salary to PF while the employer’s contribution to EPF is 10% or 12%.

“If the new salary code will reduce the net salary of employees, their social security fund as well as the amount of the bonus after retirement will be larger because the bonus is also calculated on the basis of the base salary, which will increase”, said Balwant Jain, editor of Apnapaisa.com. “However, the good thing is that your tax liability will also be reduced, as employers typically include their employee PF contribution in their cost to business (CTC),” Jain added.

Despite the reduction in tax payable, the overall impact on employees’ take-home pay will be negative and will affect lower income earners the most, as they typically end up with less surplus after covering their expenses. monthly and their loan. EMI if applicable. The situation will be more difficult for people managing a home loan in addition to a car loan or a personal loan. For these people, their EMI responsibility is generally more than 40% of their take-home pay. So even a 10% cut in take-home pay will pinch them the most.

To understand this, let’s consider an example. Suppose your gross salary is currently Rs 1 lakh and your base salary is Rs 20,000. Your total PF contribution (including employer contribution) is Rs 4,800. Thus, your net salary before tax is increased. at Rs 95,200 (assuming no other deduction is theirs). Once the new code becomes applicable, your base salary must be revised to Rs 50,000. Thus, your monthly PF contribution (including employer contribution) will increase to Rs 12,000, or 150% more than your current contribution. As a result, your pre-tax take-home pay will drop to Rs 88,000, which is almost 8% less than your current pre-tax take-home pay.

In the example above, suppose you pay Rs 45,000 as an EMI. Then after reviewing your salary structure, you will have Rs 43,000 left for your monthly expenses against Rs 50,200 currently.

In such a case, you have two options either to reduce your expenses or to reduce your monthly contribution to SIP or PPF or NPS. There is an obvious temptation to stop existing SIPs, which are intended for a long term purpose. But according to investment experts, in such a case, do not stop SIPs in equity funds because their portfolio will be heavy with debt (24% of your income will go to PF, which is a debt investment) rather that they should reduce PPF or NPS Contribution depending on their tax liability.

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