In what may prove to be a double whammy for the salaried class, Union Budget 2021 clubbed with the newly launched wage code will end up decreasing not only an employee’s take-home salary but also retirement savings.
Finance Minister Nirmala Sitharaman on Monday restricted the tax-free return on investment in provident fund (PF) at Rs 2.50 lakh. PF happens to be one of the most popular choices to build post-retirement savings by most middle-class salary earners.
So far, there was no cap on the amount one could invest in provident fund to get a tax-free return. Last year’s budget imposed a ceiling of Rs 7.5 lakh a year on employers’ contribution to provident fund schemes. Now contributions of over Rs 2.5 lakh a year to employee provident fund schemes will be taxed at the time of withdrawal.
Along with this, the new definition of wages as part of the Code on Wages, 2019, passed by Parliament proposes to raise an employee’s contribution to PF and thus decrease take-home salary.
According to the Code on Wages, 2019, the government has put a cap on the allowances at 50 per cent of the total compensation. This will entail higher costs for employers and a lower take home pay for employees.
In order to abide by the new rule, employers will now have to increase the proportion of the basic pay leading to an increase in the PF contribution on part of both the worker and the employer.
Let us suppose Amit used to earn Rs 1,00,000 as his basic monthly income and contributed Rs 20,000 as PF. Now with the wage code being implemented, his PF contribution will rise to let’s say Rs 25,000. Therefore his take-home salary goes down by Rs 5,000. Now because Amit’s contribution to PF is now higher than Rs 2.5 lakh per year, therefore, according to Budget 2021, his PF will now be taxed this hitting his savings as well.
In a nutshell, wage code decreases take-home salary and diverts the money towards PF contribution. Now comes Budget 2021, caps these contributions and makes them taxable. Therefore an employee is with lesser take-home as well as dented retirement savings.
Code on Wages, 2019, was passed in August last year and is likely to be implemented from April 1, 2021.
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