Crisis induced salary-cuts: Retirement benefits under stake

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The pandemic has created challenges for all sectors, the fear of virus to extended lockdowns to new norms of social distancing. Many enterprises are finding it troublesome to sustain with the sharp revenues losses due to aforesaid measures being implemented to prevent the spread of coronavirus. As an initial step towards copping up with the sudden changes and maintaining the financial stability of the businesses, many of them have resorted to salary cuts to compensate for the losses incurred. Salary cuts have an up-front influence on the take-home salaries of the people and thus affect their financial budget as well as spending abilities. Also, salary cuts can also have an impact on some of your retirement benefits.

On implementing salary cuts, the components of salary are further revised on a proportionate basis. Most of the organizations in the private sector have a salary structure based on the cost-to-company (CTC) structure. “In almost all cases it is noticed that on account of salary cuts, a proportionate cut is realized across the various heads of the salary,” said Rituparna Chakraborty, co-founder and executive vice-president, TeamLease Services. Therefore, the cut will have an impact on some of the retirement benefits, which are based on the basic salary.

Provident Fund

According to the Employees’ Provident Fund and Miscellaneous Provisions Act, employees have to contribute 12% of their basic wage plus dearness allowance towards PF and a similar contribution of 12% is made by the employer as well. A lower PF contribution will influence the net retirement corpus of the employee.

Gratuity

Another perk that is expected to get influenced is gratuity. “The gratuity is based on the basic salary and dearness allowance. If your basic salary has been affected by pay cut, then your gratuity will be affected,” says Adhil Shetty, CEO of Bankbazaar. A gratuity is paid when a person retires or leaves a job after serving for at least five years. Salary cuts are more inclined to influence those who are nearing retirement or intending to leave the job or facing a situation job loss. On finishing five years of service, the company has to pay an amount corresponding to 15 days of the last drawn salary for each year of service of the employee.

Way forward

Employees have the choice to contribute more towards PF by a voluntary provident fund (VPF). If their personal finance budget permits, they can advance more towards VPF to make up for the loss of lower PF contribution. VPF also enjoys the same returns and tax benefits as EPF. Gratuity is based on the last drawn pay, there is hope for those who are working. So, even if the employees are facing a salary cut now, as time improves salary goes up again, the gratuity amount will accordingly rise.

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