For the salary class people, there may soon be a double hit. With the union budget and the recent Laghu wage code coming into effect, both the salary class employees’ take-home salary and retirement savings can be severely hit. Finance Minister Nirmala Sitharaman on Monday announced the abolition of tax-free returns on investments up to Rs 2.50 lakh in provident funds. For most salary class employees, PF is the best way to raise money for retirement.
Till now, there was no cap on investing PF money to get tax free returns. In last year’s budget, a limit of 7.5 lakh per year was imposed for this. Now, contribution of more than Rs 2.5 lakh in Employee Provident Fund schemes will be taxed at withdrawal. Also, according to the 2019 wage code, employee contribution to PF will be increased. This will also reduce take home salary. In order to comply with the new rules, the employer (company) will have to increase the basic salary. This will increase PF contribution from the workers and the company.
For example, suppose Amit’s basic monthly income is Rs 1,00,000. Its PF contribution is Rs 20,000. After the implementation of the wage code, Amit’s PF contribution will be Rs 25,000. This will reduce the take-home salary by Rs 5,000. Now when Amit’s PF contribution will increase, according to Budget 2021, PF above Rs 2.50 will be taxed. In this way, the employees who are saving the PF will also be killed.
Overall, the implementation of the wage code will reduce take-home salary and increase PF contribution. Now according to Budget 2021, PF above Rs 2.5 lakh will be taxed. In such a situation, both the take-home salary and retirement savings of the employees will be reduced.
Let us tell you that Voz Code was passed in Parliament in August last year. And it will come into effect from 1 April 2021.