The greed of high salary in hand may not weigh heavily on old age, understand this mathematics of the new labor code.

Who wouldn’t be happy if the take-home salary coming into the bank account every month suddenly increases? Under the new Labor Code, now employed people are going to get a similar option, through which they can increase the amount they take home every month by reducing their PF contribution. This scheme sounds very attractive as it will leave you with more money to spend in your pocket, but wait! This shining coin can also cloud your future. Actually, this is going to have a direct impact on your retirement fund.

Financial experts clearly say that if you do not invest this extra money that comes in your hand every month, then you may face a huge financial shock in old age. In fact, a debate has now started among employed people whether it is better to take more salary every month or it is wiser to quietly let the PF be deducted. Let us try to understand what is the real mathematics of this whole game.

How will your take-home salary increase?

Explaining the practical aspect of this new rule, Jaigle CEO Sudhir Kaushik says that at present 12% of the basic salary is deposited in the EPF account. In the old style, many companies used to deduct PF on the actual basic salary only, or the statutory salary limit (wage ceiling) of Rs 15,000 was used as the basis. In this context, at least Rs 1,800 would have gone into the PF account.

Even in the new Labor Code, this mandatory contribution of 12% has been kept applicable only up to the limit of Rs 15,000. Deducting PF on salary above this is completely your choice i.e. voluntary. In such a situation, if you talk to your company and reach a mutual agreement, then you can lock your PF contribution at a minimum of Rs 1,800 every month. By doing this, the remaining money deducted from PF will be directly added to your take-home salary and you will start getting more cash in your hands every month.

These 5 types of people should not choose this option even by mistake

Even though the rules are the same for everyone, Nisha Sanghvi, Director of Promor Fintech, believes that this decision of increasing in-hand salary will not prove to be right for everyone. It is being told that certain categories of employees should not make this mistake of PF deduction:

• People completely dependent on PF: Employees who are solely relying on EPF for planning for their old age and retirement.
• Loss of Company Contribution: Whose companies put 12% of the entire basic salary in PF. If you reduce your share, it is possible that the employer may also stop its voluntary contribution.
• Employees above 40: Employed people who are above 40 years of age because they have very few years left to create a retirement fund.
• Not having the habit of saving: Those people who do not have the habit of saving money or who do not have any kind of emergency fund.
• Risk Afraid: People who are afraid of stock market fluctuations. Keep in mind that currently EPF is offering excellent tax-free secured interest of 8.2% or 8.25%, which is impossible to get in any other fixed deposit or government scheme.

One small decision and Rs 80 lakh will be lost!

Now let us look at this whole matter in the mirror of statistics to see how big the loss can be. Suppose the basic salary of an employee is Rs 50,000. According to the rule of 12%, Rs 6,000 is deposited in his PF account every month. If he decides to take advantage of the new rule and deduct only Rs 1,800, his take-home salary will increase by Rs 4,200 every month.

Lookwise this deal seems profitable, but its mathematics over a long period of 25 years is scary. If the same Rs 4,200 were kept deposited in the PF account, then after 25 years at the compound interest rate of around 8.25%, you would have created a strong fund of around Rs 41 to 42 lakh, which will not be available now.

Nisha Sanghvi says that the story does not end here. If the company also stops its voluntary contribution in view of your deduction, then the blow to your retirement corpus can double i.e. around Rs 80 lakh. Apart from this, there is also a tax issue. As your take-home salary increases, your income tax liability may also increase, whereas the money deposited in PF and the interest earned on it is completely tax-free.

So is this new rule beneficial for anyone?

Financial experts believe that cutting PF can be a wise step only in some very special and selected circumstances. For example, if you currently have an expensive loan (like a personal loan or credit card dues) with a high interest rate like 12 to 14 percent, you can opt for a higher salary every month. Repaying the 14 per cent loan as soon as possible is a much better and practical financial move than earning 8.25 per cent interest on PF.

Moreover, this option suits only those disciplined investors who can afford to extract higher returns than PF by putting their increased take-home salary into equity mutual funds or other aggressive investment vehicles. If you cannot be serious and disciplined about investments, then allowing PF deduction under the old system is the safest and best strategy for the future of you and your family.