New salary structure to come into force from April 2021; know it will affect you

Usually, most companies keep less than 50 per cent of the non-allowance part of the employee's salary so that they have to contribute less to EPF and gratuity and reduce their burden. But after the new pay code is implemented, companies will have to increase the basic salary. This will reduce the take-home salary of employees, but increase PF contributions and gratuity contributions. Also, the employee's tax liability will be reduced, as the company will add its PF contribution to the employee to its CTC (Cost-To-Company).

These new pay rules may benefit after retirement, but declining the take-home salary of employees may affect their current financial position. They will have lower cash in hand than they did every month. This can worsen the household budget, loans, SIP, etc. Usually, 40 per cent of the salaried class goes into paying EMIs, including home loans, car loan EMIs. It can be difficult to manage if the take-home salary is reduced by 10 per cent according to the new pay rules.

Let’s suppose your current salary is Rs 1 lakh a month, and the basic salary is Rs 30,000. That means, your salary reaches 1 lakh by taking into account allowances, etc. So, the employee and the company contributed PF at 12-12 per cent or Rs 7,200. So your take home salary before tax is Rs 92,800. We are here assuming that there is no other deduction. 

When the new wage rule or pay rule comes into force, the basic salary will go up to Rs 50,000. Therefore the total PF contribution will be Rs 12,000. So, the take-home salary before tax will be Rs 88,000 a month, which is Rs 4,800 less than the previous salary.

Now, let's say you pay Rs 40,000 as EMIs every month. After the new salary structure, you will be left in your hands (88,000-40,000) Rs 48,000, while according to the old salary structure, you used to have (92,800-40,000) Rs 52,800, that is, you will have to save Rs 4,800 less than the earlier (52,800-48,000) in your hand.

In such a situation, you cut SIP, PPF or NPS to balance expenses or reduce your daily expenses. SIP is not to be cut, but take a decision only after consulting your financial advisor. As for spending cuts, you have to control it to some extent.