New labour codes likely to boost pension, trim monthly salaries: Tax expert

Salaried employees may get slightly less in monthly take-home pay but their contributions to compulsory retirement plans will increase, he says

India’s new labour codes are likely to reduce people’s take-home month pay but increase the money saved for retirement, a financial expert has said.

 

The shift could “quietly add” more than Rs 2 crore to long-term savings, said Sujit Bangar, founder of TaxBuddy.com, a fintech platform, in a LinkedIn post.

 

Businesses typically kept basic pay in salaries at 30–35 per cent of cost-to-company (CTC). This allowed a larger share of earnings to flow into tax-friendly allowances, while Provident Fund (PF) and National Pension Scheme (NPS) deductions remained modest.

 

“Earlier, the basic salary was roughly 35 per cent of CTC. Majority of the salary sat in allowances, this is why older structures kept PF lower,” Bangar said.

 

The new labour codes mandate that the basic salary must be at least 50 per cent of CTC. Since PF and NPS are calculated as a percentage of basic pay, their contribution rises automatically, leaving employees with a slightly lower monthly take-home salary.

 

Boost for retirement

 

Bangar cited as an example a 30-year-old employee earning Rs 12 lakh annually to calculate how her finances will change:

 

• PF contribution (employee + employer)
• Earlier: Rs 7,200 per month
• Now: Rs 12,000 per month
• Extra monthly PF: Rs 4,800

 

NPS contribution

 

Increases proportionately as basic pay rises from 30 per cent to 50 per cent of CTC

 

“PF alone adds about Rs 1.24 crore extra in 30 years. NPS alone adds around Rs 1.07 crore. Together, the retirement corpus rises from Rs 3.46 crore to Rs 5.77 crore,” he said.

 

The figures are based on a typical 35-year working span, with PF earning around 8.5 per cent yearly and NPS delivering about 10 per cent.

 

Bangar argued that compulsory, automated retirement contributions work better than voluntary savings for most people.

 

“Mutual fund SIPs usually break within 3–5 years. FDs [fixed deposits] get liquidated. Voluntary savings depend on discipline. But PF and NPS are automatic, compulsory and deduction-based, that’s why they build lifetime wealth.”

 

For many salaried workers, the new labour codes could help build a sizeable retirement cushion, even if it means less cash in hand today.