December 28, 2020
Hello and welcome to All Indians Matter. I am Ashraf Engineer.
If you’re a salaried employee, your take-home salary could reduce from the next financial year. Under the Narendra Modi government’s new compensation rules, which are part of the Code on Wages, 2019, taxable components of your wages will rise and so will the costs on your employer.
Companies will need to restructure pay packages significantly now. As per the new rules, the allowance component cannot exceed 50% of the total salary. Essentially, basic salary has to be 50%. This is a taxable component, thus reducing what lands in your bank account at the end of the month.
At a time when millions have taken pay cuts to keep their jobs and businesses are earning significantly less, this is a huge burden that will be made heavier if you’re paying loans or have unavoidable expenditure like medical treatment for yourself or your family.
To keep your take-home salary the same, employers will have to increase the basic component of salaries. At a time of such economic turmoil, this is unlikely to happen in most cases. If your employer doesn’t increase the basic component, you’ll simply get less in hand. If your employer does increase the basic component, there will be a proportional rise in gratuity payments and employees’ contribution to the provident fund. The new wage rule would elevate company costs by 10% to 12%.
Here’s how you would be impacted in money terms.
Let’s say your overall salary is Rs 25,000.
The basic salary at 30% of the cost to company, or CTC, would remain the same at Rs 7,500 but the special allowance would fall from Rs 8,332 to Rs 7,839. HRA, conveyance allowance and travel concessions would remain the same at Rs 4,000, Rs 1,000 and Rs 2,000 respectively. The employer contribution to the provident fund would rise from Rs 1,800 to Rs 1,900. The gratuity payment would rise from Rs 368 to Rs 762. After taking into consideration the employee contribution to the provident fund, the take home salary would reduce from Rs 21,032 now to Rs 20,439 after April 2021.
Not surprisingly, salaried employees and industry are worried. Representatives of industry associations such as the CII and FICCI made a case for holding back implementation of the new rules. They argued that, while the social security benefits of the rules are good, salaried employees are not ready for it due to the deep and widespread economic slowdown. They suggested that implementation of the rules be put on hold till the economy rebounds.
Remember, GDP growth plummeted to -23.9% at one stage, causing millions of jobs to vanish virtually overnight and massive reductions in income virtually across the board.
India entered its first ever technical recession recently – disastrous for any economy, but especially so for a developing country. It meant lower consumer and industrial spending, and even more job losses.
This is not a mere slowdown. The pain inflicted by COVID-19 will last long. For an economy on the downturn, the need of the hour is more cash in hand for people in order to boost consumption. Instead, you’re being left with less and less.
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