Sign In
By signing in or creating an account, you agree with Associated Broadcasting Company's Terms & Conditions and Privacy Policy.
By signing in or creating an account, you agree with Associated Broadcasting Company's Terms & Conditions and Privacy Policy.
New Delhi: After the inclusion of the new Labour Codes, it is now mandatory for companies that the employee's' wage '(Wages) i.e. basic pay, dearness allowance and retaining allowance should be at least 50% of the total 'Cost to Company' (CTC).
Simply put, if the basic salary in your salary structure was low and the allowances (allowances) were high, then now companies will have to increase your basic salary. However, the total CTC of existing employees cannot be changed, so companies will have to reshuffle the salary components (Components). This will have a direct impact on both your take-home salary and tax savings.
The biggest effect of this new rule is that by increasing the basic salary, the contribution of both employees and the company in statutory benefits (Statutory Benefits) like PF (PF), NPS (NPS) and gratuity will increase. Since these contributions are based on basic salary, the monthly salary (take-home salary) in your hands will decline due to their increase.
But, the other side of the coin is that it can reduce your tax liability considerably. According to the calculations, if your annual CTC is Rs 15 lakh, then under the new regime you can save tax of about Rs 75,871. At the same time, employees with packages of Rs 20 lakh and Rs 25 lakh will also be able to save tax in thousands.
According to CA (Dr.) Suresh Surana said that the new wage code will especially change the salary structure of those employees whose share of allowances and flexible components was high in the package till now. Even if it reduces immediate monthly income, it will strengthen the retirement corpus and prove to be more beneficial in terms of tax.
Data analysis by Ashish Philip and CA Surana, executive partners of Lakshmikumaran and Sreedharan Attorneys, reveal an interesting picture. Let us understand how it will affect different salary brackets.
Rs 15 Lakh CTC: After the new rules, your taxable income will be reduced by increasing the basic salary and PF/NPS contribution. The calculation suggests that you will be able to save around Rs 75,871 of tax annually. However, your monthly take-home salary may come down by around Rs 4,380.
Rs 20 lakh CTC: Tax savings in this bracket would be around Rs 25,634. But, as the amount deducted in PF and NPS will increase, the monthly take-home salary may fall drastically by about Rs 12,134.
Rs 25 lakh CTC: It is estimated to save about Rs 40,053 in tax. At the same time, in-hand salary may decrease by about Rs 14,500 per month.
Ved Jain and Associates partner Ankit Jain says that higher basic salary means more investment in PF and NPS. This not only saves taxes but also creates a large retirement fund in the long term.
You will get benefits of retirement funds and tax exemption
Under the new rules, the contribution made by employers to NPS (NPS) is deductible under Section 80CCD (2), which can be up to 14% of the basic salary. Since the basic salary has increased now, the scope of tax exemption will also increase automatically.
Ankit Jain clarifies that the employer's total contribution to PF, NPS and superannuation remains tax-free only up to Rs 7.5 lakh per annum. The amount above this will be considered taxable in the hands of the employee. At the same time, there is good news for gratuity. A higher basic salary means more gratuity during retirement or quitting your job. However, under Section 10 (10) of the Income Tax Act, the limit of tax exemption on gratuity is still Rs 20 lakh.
Overall, the new Labour Code is reducing cash from your pocket, but it is also proving to be an effective way to secure your future and reduce your current tax liability. Companies are now restructuring the salary structure accordingly.
