EPF corpus and gratuity are determined dependent on the basic salary and dearness allowance of the employee. These retirement advantages are a boon to employees for tax savings as well as financial planning.
A cut or change in the salary structure may affect comparable advantages since they purely depend on the basic salary component.
The spread of COVID-19 has affected the economy in different ways. A lot of organizations are confronting financial misfortunes because of lockdown and isolation measures implemented to break the spread of the pandemic.
Along these lines, a lot of organizations are turning to salary cuts for workers to cut down their misfortunes. Pay cuts are causing a genuine impact on financial plans and the spending capacities of people.
Employee Provident Fund and Gratuity are determined simply dependent on the basic salary and some other salary segments. So dependent on the salary cut, the month-to-month commitment to these advantages may shift. On account of a salary cut, the different salary parts are overhauled to a specific extent. In this article, we are examining its different parts and attempting to make sense of whether there is an exit from this jumble.
A large sector of corporate and private organizations follows the cost-to-company (CTC) structure. So when a salary cut is actualized in an organization, it is executed by the different salary heads in the association. So the cut will affect various advantages, which are subject to the basic salary structure.
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Impacts of Salary Cut on EPF Corpus
According to the EPF Act 1952, all employees need to contribute 12% of the basic pay of the worker and the DA sum towards the PF corpus. The business likewise makes a coordinating commitment of 12% as equivalent to the employee.
On the off chance that an individual has a ‘basic salary + DA’ of INR 20,000, his month to monthly contribution towards PF would be INR 2,400 month to monthly and INR 28,800 every year. The business likewise contributes a similar sum towards his/her PF and henceforth the joined month to monthly contribution towards their record would be INR 4,800.
So if there is a salary deduction of 20% as the cut, the ‘Basic + DA’ segment will diminish to INR 16,000, and consequently, the consolidated PF commitment would become INR 3840 every month rather than INR 4800.
The lower commitment scale will affect the development of the worker. The current pace of enthusiasm for the EPF corpus is 8.5%. On the off chance that we consider a similar model for an individual who has 20 years of administration period remaining, his development corpus will diminish by 6 lakh Rupees.
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How is gratuity influenced by salary variance?
The gratuity sum relies upon the length of service and the last drawn salary of the representative. It is the capacity of the basic salary and dearness allowance. On the off chance that a representative’s basic salary has been influenced by the salary decrease or cut, the gratuity will be affected significantly.
The gratuity corpus is paid when an individual resigns or leaves the activity in the wake of serving a base time of 5 years. The salary slice sway is going to influence generally the representatives who are approaching retirement or confronting work loss because of the pandemic. By finishing the base five years of the administration, the association is obligated to pay the sum compared to 15 days of the last drawn salary for every time of administration.
If we consider the case referenced over, the ‘basic salary + DA’ of the worker is INR 20,000. On the off chance that the worker has finished 8 years of service in the current organization, the gratuity sum will be equivalent to;
(15/26 x last drawn salary x periods of work) = ₹92,307
On the off chance that the salary cut of 20% is actualized, the gratuity sum will decrease to ₹73,846.
What is the Solution?
The best way to work around this circumstance is to decrease the cut in the basic salary. If there is an opportunity, the representative ought to examine the salary segments with the businesses and request to decrease in the cut in the basic salary segment.
Salary structure isn’t for the most part altered for every representative, and it is uniform across all the individuals in the organization. Employees do have a choice to change the salary structure by requesting it with the employer/company representative. Even though it is difficult to do so.
Organizations considering salary components as an option in contrast to money related misfortune, ought to consider different approaches to reduce different salary segments other than basic compensation. The current methodology with lesser basic compensation will affect the EPS corpus, Gratuity, HRA, and various other benefits.
The current salary cut, if not disavowed, will bring about lower retirement benefits and fewer duty exclusions. The workers who are approaching retirement age will be affected by this circumstance the most, in light of the fact that they probably won’t get sufficient opportunity to save more. Others have a couple of more years left to spare more later on and compensate for the current decrease in the investment fund sum.
Representatives can contribute an extra amount to PF if their financial plan permits them. This office, given by the EPFO, is named as Voluntary Provident Fund (VPF). VPF offers comparable returns and tax cuts to EPF. The Gratuity sum is intensely subject to the last drawn salary.
So, for the individuals who are working at this moment, they have more along these lines. Regardless of whether the workers are confronting a compensation cut at this moment, the circumstances may improve, and the salary scales may increase. Since Gratuity is something that influences the last drawn salary alone, representatives who are not moving toward the retirement age can think about this as a chance to save more funds towards it.
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