Once new wage code kicks in, you may need to shed some debt weight

Wage code raises EPF contribution, to offset this invest less in PPF or NPS

The government has notified the draft rules under the Code on Wages 2019. According to it, from April 2021 your wage (which includes basic pay and dearness allowance) must be at least 50 per cent of total pay for the purpose of calculation of gratuity and provident fund contributions.

Experts say the new rules will enhance social security. Prashant Singh, business head compliance and payroll outsourcing, TeamLease Services says, “On the one hand, it will reduce employees’ take-home salaries. On the other, they are likely to get higher gratuity payments. Employers’ contribution to employees’ retirement corpus may also rise.”

These changes may, however, require employees to tweak their personal financial plans.

What you should do over the next six months: First, look up your salary structure once again to gauge the likely impact. Those impacted by the new rules are likely to end up with lower cash-in-hand. They may need to rejig their household budgets. Mrin Agarwal, founder-director, Finsafe India says, “Go through your budget and try reducing expenses.”

If you don’t have an emergency fund in place already, you still have a few months to gather the money before the new rules kick in. Agarwal says, “Gathering a corpus equivalent to three-six months’ expenses, including loan EMIs, is a good start.”

WHAT THE CODE OF WAGES, 2019, MEANS FOR YOU

• Your salary has a wage component (basic and dearness allowance) and a non-wage or allowance component
• From April 2021, the wage component of salary, for calculating gratuity and provident fund, must be at least 50 per cent of an employee’s total pay
• If the non-wage portion (called exclusions) is more than 50 per cent, then the excess over 50 per cent must be added to wages
• Employers’ contribution to EPF and the gratuity employees receive could increase as a result
• But take-home salary of employees’ could decline

What you should do post-April 2021: Once the new rules kick in, you will have less cash-in-hand and may feel tempted to scale back on savings and investments. This should be minimised, or else you risk jeopardising your long-term financial wellbeing.

You will also need to revisit your portfolio asset allocation. With your employer’s and your own contribution to Employees’ Provident Fund (EPF) going up, your portfolio is likely to become heavier on the debt side. You will need to correct this tilt. If your portfolio is more debt-heavy than is warranted by your risk appetite, it will mean lower returns over the long term.

With your EPF contribution rising, you may also need to reduce your contribution to either the Public Provident Fund (PPF) or the National Pension System (NPS). Weighing the pros and cons of the two schemes, Balwant Jain, tax and investment expert, says, “In the case of NPS, you have to compulsorily buy an annuity using 40 per cent of the corpus. Income from annuity is also taxable. Such compulsion and adverse tax implication are not there in PPF.” The PPF corpus is tax-free on maturity and you don’t have to mandatorily invest a part of the corpus anywhere.

But NPS contribution entitles you to an exclusive tax deduction of Rs 50,000 under Section 80CCD(1B). Jain says, “If your total contribution to Section 80C, including NPS, is not more than Rs 1.5 lakh, you should reduce your investment in NPS. But if you exhaust the Rs 1.5 lakh contribution without using NPS and need to use Section 80CCD(1B), then reduce your contribution to PPF rather than to NPS. Reduction in NPS contribution will otherwise enhance your tax liability.”