Saturday, December 15, 2012

Salaried Employees - Get Ready for a Reduction in your Take Home Salary

Are you a Salaried employee of an Organization? Does your employer offer Provident Fund benefits? If so, the following article has both Good and Bad news for you.

Before we Begin: Employee Provident Fund or PF in short is a retirement benefit that is provided to all individuals who work as salaried employees of organizations across india. A % of their basic salary is usually deducted as provident fund and remitted against their PF Accounts. An equivalent contribution is done by the employer as well. This money earns an interest and is given to the employee at the time of retirement as a bulk settlement.

The Employees Provident Fund Organization (EPFO) has come up with a new ruling that could potentially spell “BAD” news for almost everyone who would read it. I personally would consider that a blessing in disguise but the fact of the matter is, in the immediate future, it would definitely be considered as Bad News.

So, what is this news?

The EPFO has decided that:

The PF contribution of an employee will now be deducted not just on his/her basic salary but on their gross income.


Is this BAD News?

In the Immediate Future - Of course, YES. I will explain the Good News part shortly. For now, lets find out how this is bad news.

Let us say your monthly salary is split up as follows:

Basic Salary: Rs. 25,000/- p.m
Other Allowances: Rs. 10,000/- p.m

Net Monthly Salary: Rs. 35,000/-

Current PF Amount (Contribution by both Employee + Employer): Rs. 6,000/- (3,000 + 3,000)

Proposed PF Amount: Rs. 8,400/- (4,200 + 4,200)

Difference: Rs. 2,400/- per month additional contribution to the Employee Provident Fund Account.

What Exactly is the Bad News here?

Most Organizations in india currently offer salary on a CTC (Cost To Company) basis wherein they fix a total salary per year that is inclusive of all components like Basic Salary, House Rent Allowance, PF, Gratuity etc. So, this additional PF contribution will obviously get deducted from your monthly salary.

If the above calculation was for someone on CTC it would mean:

Salary: Rs. 35,000/- p.m

Old Take Home Salary: Rs. 29,000/- p.m (After deducting old PF amount of Rs. 6,000/-)

New Take Home Salary: Rs. 26,600/- p.m (After deducting new PF amount of Rs. 8,400/-)

Effectively your Take Home Salary has come down by Rs. 2,400/- and this is Bad News Right???

Is there any Good News here?

Actually YES. I am pretty sure most of you who are on CTC type salaries will disagree but the fact is, there is a significant good news.

Good News No. 1:

If you are not on CTC and the employer side PF and other Retirement Benefits are over & above your salary (like Government Employees) then your total Gross Salary is effectively being hiked. Look at the non CTC calculation for the same individual below:

Salary: Rs. 35,000/- p.m

Old Net Salary: Rs. 38,000/- (Including Employer PF contribution = Rs. 3000/-)

Old Take Home: Rs. 32,000/- p.m (After deducting Employee PF Contribution)

New Net Salary: Rs. 39,200/- (Including Employer PF Contribution = Rs. 4,200/-)

New Take Home Salary: Rs. 30,800/ p.m (After deducting Employee PF Contribution)

As you can see, though your take home salary has come down by Rs. 1,200/- your total salary has gone up by the same amount because your employer too is being forced to shell out his part of the contribution and hence your net effective salary is UP.

Good News No. 2:

As the PF is going to be calculated on your total gross salary, your PF contribution every month is going to be significantly higher than what it was earlier. Though you will feel a small pinch in monthly cash flow due to the lower take home salary, you will definitely retire rich.

Ex:

Let us take the same example where Rs. 6,000/- was contributed as PF every month. So, in one year you will accumulate Rs. 72,000/- per year in your PF Corpus as per the old calculation. However, as per the new calculation you will be accumulating Rs. 1,00,800/- which is a significant increase. If you consider the fact that, this will continue for the next 20 or 30 years that you work, your retirement corpus will be a whole lot bigger when you retire.

So, in the long run, this is definitely GOOD NEWS.

Some Last Words:

As of now, there is not much clarity on what all components of a persons CTC Salary would be considered for this PF Calculation. There is also speculation that there is an upper limit of Rs. 6,500/- per month as the amount considered as Salary for calculation of PF for both employer and employee contribution. However, here again there is not much clarity on this as to whether this limit will be enforced.

Anyways, in the next few weeks/months we should get that information as well. The moment the info is released to the public, you can expect the same to be covered here – like always!!!

6 comments:

  1. I am now 60 years old; I left my last job at the age of 52 and have been an independent consultant since then in the same field of engineering design. I worked for 4 years in my last job, and the retirement age in that organisation is 58. The provident fund is a private provident fund managed by the organisation. If I now withdraw my PF in that organisation, will the withdrawal be liable to tax deduction at source. Will the amount be taxable in my hands for the financial year in which I receive the amount.Shall be grateful for your reply.

    ReplyDelete
    Replies
    1. Hi,
      PF withdrawal at Retirement is not taxable. So, if the private org is closing your PF account because you reached retirement age, I dont think the amount is taxable.

      However, if the PF account was closed due to any other reasons, then the amount is taxable in the financial year when the money is received.

      Anand

      Delete
    2. Hello Anand, Thank you very much for your prompt reply. In my case, I resigned at the age of 52 and hence my account was closed. I have not contributed to PF anywhere else as I am working independently. As I am now past the age of retirement, can I claim the amount without a tax liability. Thanks in anticipation of your kind reply. Best wishes to you and all readers for the New Year.

      Delete
    3. Hi Anonymous,
      Thank you for your wishes.

      As you retired long back, technically you should have withdrawn the pf corpus at retirement because that is the way PF Accounts are built.

      Anyways, not withdrawing is not a crime but you may have to answer a few questions raised by your prev employer or the PF department.

      However, you need not worry about taxes because, there will definitely be no tax liabilities.

      Happy retirement.

      Anand

      Delete
    4. hi anand,

      I guess premature withdrawal of PF attracts tax liability based, on case to case basis. The inquirer seems to have resigned and I guess he might attract taxes.

      Delete
    5. Ukmitra,
      Yes, taxation varies on a case to case basis. But, in this case he has reached the retirement age and has completed service. So, in this case it will not attract taxes.

      Reg. taxation: PF Withdrawal is taxable if you close your account before it completes 5 years of age.

      Anand

      Delete

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