Here is how salary cuts impact your PF and gratuity

Here is how salary cuts impact your PF and gratuity

Revenues are falling very steadily. With the lockdown that has been imposed to prevent the spread of the virus, a lot of businesses are now finding it tough to sustain themselves. A lot of businesses have also had to resort to salary cuts to curb down on their losses. This then has a direct impact on the take-home salaries of the employees. Ultimately, the financial budget and spending capacities of employees are being severely hit. 

Salary cuts also have an impact on the retirement benefits that employees are entitled to. Let us try to look at ways out of this problem. 

When there is a salary cut, the components of salary are revised on a proportionate basis. That is to say, most organizations have a salary structure that is based on the cost to the company structure. In most cases, therefore, when there is a salary cut, the in proportion cut is also put into effect across various other salary heads as well. 

Employees must contribute 12% of their basic wage as well as their dearness allowance towards the PF as per the Employees' Provident Fund and Miscellaneous Provisions Act. A similar contribution of 12% is made by the employer. 

Let us say that a person has a salary and dearness allowance of INR 20,000. His monthly contribution to his PF will be INR 2400. His employer will also contribute the same amount, which adds up to INR 4,800. 

When there is a 20 percent salary cut, the basic pay, and dearness allowance reduces to INR 16,000; and the PF contribution also then falls to just INR 3840 per month. This goes on to impact the retirement corpus of the person. 

Another benefit that gets impacted is gratuity. This is paid when a person retires or leaves his job after serving for at least 5 years. Thus, those who are nearing retirement or are leaving their job, or are at risk of a job loss in the coming future will be affected by this. Once five years of service have been completed, the company needs to pay an amount that is equal to 15 days of the last drawn salary for every year of service. 

Let us say that the basic and dearness allowance came up to INR 20,000. The employee had worked for eight years. In this case, the gratuity is 15/26 x the last drawn salary x years of service. This totals up to INR 92,307. If there is a 20 percent salary cut, this will come up to only INR 73,846. 

What is the way out?

Can employees possibly discuss their salary structure with the employees to lower the cut in their basic salary? Salary structures are not customized to suit each employee and similarly apply throughout the organization. However, an employer can tweak the salary structure, and an employee can negotiate it with the employer. Companies that are looking at salary cuts also need to look at alternative approaches now. The former approach of low basic pays will naturally have an impact on the quantum of PF contributions, HRA, and gratuity. This will then result in lower retrials and also lower tax exemptions. Those who are nearing retirement have been the worst affected since they do not have enough time now to be able to save more. On the other hand, those who still have a few years left can save more in the future, to some way make up for lower savings. 

Employees also have the option of contributing more towards PF through a Voluntary Provident Fund. If their budget allows, they can invest more towards the VPF later on. Also, VPF enjoys the same tax benefits and returns as an EPF. And since gratuity depends on the salary that is last drawn, there is still hope for those who are working.