Recently, at work, there was a restructuring of our salary components. Many concerns were raised when the outside consultants proposed that Basic pay be at least 50% of the Gross pay — it was finally fixed at 40%. I think we lost out. Here’s the math (all figures are per annum).
Suppose your Gross pay is Rs 500,000. At 50%, your Basic pay is Rs 500,000 x 50% = Rs 250,000. At 12%, your contribution to EPF is Rs 250,000 x 12% = Rs 30,000 (and which carries over fully as income tax savings). Your employer contributes an equal amount, taking your total contribution to EPF to Rs 60,000.
On the other hand,
At 40%, your Basic pay is Rs 500,000 x 40% = Rs 200,000. At 12%, your contribution to EPF is Rs 200,000 x 12% = Rs 24,000 (and which carries over fully as income tax savings). Your employer contributes an equal amount, taking your total contribution to EPF to Rs 48,000.
Observe closely. That’s a straight Rs 12,000 less in your automatic savings. You just saved your employer Rs 6,000. You also lost Rs 6,000 as part of your automatic income tax savings.
In general, the higher the Basic pay, the higher are these figures. Employer’s contribution to EPF is akin to free money. Why would you ever want to lose out on that?
And the gains? Rs 500 extra in your pocket each month.
Which option would you choose?
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