Finthoughts

Hello readers out there. Today we will have a quick glance on The Code on Wages,2019 Bill (hereinafter also referred to as Principal Bill). This is a bill passed by the Indian government on December 2019. Though we don't have a finalized date for implementation as of now, it is expected to be implemented very soon. In this article, we will see how it will affect the salary structure of the employees, Cost-To-Company (CTC), the take home salary and the savings plan.

A brief about the bill

The draft of this bill was first presented in Lok Sabha on 10th August 2017. After a lapse and a reintroduction of the bill along with acceptance of some changes recommended by a standing committee, the above said bill was passed in the both houses of the parliament. It was approved by Lok Sabha on 30th July, 2019 and by Rajya Sabha on 2nd August, 2019. It received the nod of the President on 8th August, 2019. With the implementation of the principal bill, the government would successfully merge the following acts while redefining some details. * Minimum Wages Act, 1948 * Payment of Wages Act, 1936 * Payment of Bonus Act, 1965 * Equal Remuneration Act, 1976

Through the implementation of this act, the government aims to draw parity between the employee and the employer and prohibits gender discrimination. The bill is applicable to whole of India. Everyone engaged in skilled, semi-skilled and unskilled are applicable under the bill. However, the bill excludes any Apprentices and Members of the Armed Forces Union. We will further see, how does it effect to draw parity between the employer and the employee.

Change in the salary structure

With the implementation of the principal act, the salary of every employee must comprise Basic Wages component at least 50% of their total CTC. CTC means the total salary earned by the employee gross of all deductions. Basic wages includes Basic Pay, Dearness Allowance (DA) and Retaining Allowance. In the current market practices, only 20-40% of the CTC is covered by basic and remaining is covered by various allowances such as House-Rent Allowance, Leave Travel Concession, Conveyance etc. The allowance part of the salary can never go beyond 50% of total CTC from 1st April. This is a major change in the past 7 decades. With this revision of the salary structure, the companies would end up paying more for PF, Gratuity as the basic pay component is set to increase. On the other hand, even though the CTC of an employee will remain the same, he/she will end up deriving less take home income in his/her hands. This is because, the basic component is increased thus he will have to contribute more to his PF account which will reduce his take home income. This bill will reduce the take home income but will mandate the employee to contribute more for his savings plan.

Impact on PF

Provident Fund (PF) is a deduction from the employee's monthly CTC. A sum is contributed by both the employer and employee towards the employee's provident fund account. Usually the contribution towards PF A/c is 12% of Basic Pay. So, when this bill is implemented, the basic component of salary would go up to 50%. With this increase in the basic pay component, the contribution towards PF will increase. With an increase in contribution to PF A/c the savings plan of the employee is benefitted well. But, if this happens, then the monthly deduction from salary towards PF will increase which will result in a reduced take home salary. So, people must be aware of this and plan their monthly expenditure budget accordingly. For Example: A person has a CTC of Rs. 1,00,000 with a basic pay of Rs. 40,000 and remaining components adding up to Rs. 60,000. The PF contribution in such a case would be 12% of Basic pay. That is, 40,000*12%= 4,800. Roughly, the take home salary without considering other deductions would be 1,00,000 – 4,800 = 95,200.

Same example with principal bill effected: CTC is Rs. 1,00,000. That would mean Basic Pay would be Rs. 50,000 and remaining components adding up to Rs. 50,000. PF is 12% of Basic Pay. That is 50,000*12%= 6000. Take home salary without considering other deductions would be 1,00,000 – 6,000 = 94,000. A net effect of 1,200 is reduced in take home salary and the same will get credited to the said person's PF A/c.

Impact on Gratuity

Gratuity is a statutory payment made by employers to such employees who have worked at least for 5 continuous with the same employer. Once the employee relieves from that employer, the employer must pay him a sum which would be equivalent to 15 working days' salary for every completed year of service. In simple terms, one would get a 15 days' salary multiplied to the number of years he served that particular employer. Salary here would mean last Basic pay + DA for the purpose of calculating gratuity payment. Since, the basic pay is increased now, the employees would end up having a higher receipt of gratuity in their pockets once they switch employer or retire. Example: Same case as above. Basic Pay is 40,000 and completed year of service is 30 years. Gratuity in this case would be 15/26 * 40,000 * 30 = 6,92,307. When the bill is effected: Basic Pay is 50,000 and completed year of service is 30 years. Gratuity here would be, 15/26 * 50,000 * 30= 8,65,384. Net of Rs. 1,73,077 is an increased receipt of gratuity with the implementation of this bill. This is a simple calculation of gratuity for those employees who are covered under the Payment of Gratuity Act, 1972.

Impact on Taxes

This would have a varied impact on taxes as many components of salary is effected to change. – Since the PF contribution is increased, the employee can claim a higher deduction under section 80C of Income Tax Act, 1961. However, maximum limit of deduction under this section is Rs. 1,50,000

• By increasing the Basic pay to 50% and limiting the remaining allowances to 50%, the receipt of HRA would be less. Since the basic is increased, the exemption of HRA from tax would be increased to a certain level. Exemption of HRA is the minimum of:
  • [ ] Actual HRA Received
  • [ ] 40% of Salary for non-metro cities and 50% of salary for metro cities
    • [ ] Rent – 10% of Salary.
      

(Salary here would mean Basic Pay + DA)

• During the Union Budget 2021, Finance Minister Smt. Nirmala Sitharaman proposed that, the interest on employee's contribution to PF A/c will be taxed if the contribution by such employee exceeds Rs. 2,50,000. However, this was later revised to Rs. 5,00,000. Therefore, certain employees in the higher tax bracket may end up paying taxes for the interest generated for their PF contribution if the same exceeds Rs. 5,00,000. Since the PF contribution is likely to increase with the implementation of the bill. Therefore, the taxability of PF Interest must be kept in mind while doing tax planning.

### Conclusion With this implementation of the Wage Code Bill, 2019, a reform in the salary structure would take place. This bill impacts the salary structure alone and not the salary itself. This will have a varied result for varied sect of people. Those already having a salary structure with proportionately high basic pay won't be affected much. But for those having a salary structure with proportionately basic pay would have certain impacts. An expert opinion to tackle the adverse effects would be advisable. Will meet you all with another article next week. Happy reading, happy learning until then.

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In this series of “Book Summary: Rich dad Poor dad”, I've been trying to summarize the book Rich Dad Poor Dad, authored by Robert. T. Kiyosaki. It primarily focuses on management of personal finance. The book covers a various range of lessons, which a middle-class and a poor person can apply it in daily life. In the first article, we saw lessons from the book about the income and rat-race, importance of information, nature of assets and liabilities. In the second article, we covered the importance of education, concept of cashflow and cashflow of various persons. We will try to cover the rest of the lessons of the book in this article.

The real idea behind employment

Work to learn- Don't work for money

The author was 9 years old when he was offered his first job. He was offered to work for 10 cents an hour, 3 hours a week on every Saturday. The rich dad offered this job to the author and his friend Mike, when they first enquired him about becoming rich. The job was to clean the shelves of the departmental store owned by rich dad. Few weeks later, the boys were frustrated as they didn't learn anything new but just kept dusting the shelves. The author felt like wasting his time in store at the cost of missing his softball games. He felt exploited when he earned such a low income but learned nothing and expressed the same to the rich dad.

After the author ended pouring out his frustration to his rich dad, the latter simply disagreed with the feelings of the author. Rich dad said

Life doesn't teach you with words, but by pushing you around. Some let life push them around; others get angry and push back against their bosses. Some people learn a lesson from it and welcome life to push them around.

People who don't learn the lesson, spend their lives blaming everyone else. When the author had asked his rich dad, what lesson he has learned by working for 10 cents an hour, the rich dad said, “the most people blamed others when in fact their attitude is the problem.” So, what would solve the problem? Our Brain. The rich dad said that, people should learn how the money works in order to make money work for them. When rich dad asked whether the author is still interested to continue the lessons, the author nodded. Rich dad then said, he will cut down his pay fully. The author must have to work three hours every Saturday in the store for free of cost.

The author and his friend Mike, worked for three more weeks and rich dad showed up one day, took them out for an ice-cream. The rich dad, offered increment to the boys. He offered them 25 cents per hour and went up to $5 per hour which the boys didn't accept. The rich dad was glad that they didn't have a price. The key lesson here for the boys is to make them overcome the fear of having nothing. This fear of having nothing would make people earn more, which would in turn increase their greed. This would increase their consumption, in turn making them try to earn more. This is the dreaded rat race that we discussed in the part-1 of the series as well.

Earning and Learning

Job security meant everything for my poor dad. Learning meant everything for my rich dad.

We live in a world where most people are qualified with a degree and spend their lives working for a job they were offered, working for money no matter how irrelevant the job may be for their qualification and passion. They are not to be blamed completely, considering the family financial background and the circumstances they come from and live in. Very few are particular in pursuit of knowledge and learning. More than the offered salary package, the knowledge we gain and the exposure we get in that job must be considered. There are many people here who are greatly talented but struggle financially. It is the lack of financial knowledge which puts them in such a plight. With a good skill set, pursuit of knowledge and financial literacy, everyone would come out of the financial struggle and the so called rat race. My personal suggestion would be to start working for money. Invest this earned money in various assets which would create other income for us. This would give us an edge and financial independence.

Management skills

According to author, developing the skill-set to manage the below three aspects are important for our success

• Cashflow
• Systems
• People
  

Managing Cashflow

We have discussed about the concept of cashflow in great detail in the previous article. In short, the inflow and outflow of cash from and to our pockets is called cash flow. Asset makes an inflow of cash by putting money in our pockets and liabilities incurs an outflow of cash by taking money out of our pocket. Having this in our mind, and understanding the income statement and balance sheet (illustrated in previous article) of rich, middle-class and poor persons, one can easily manage his cashflow and get the knowledge of what he must do further with his wealth.

Managing Systems

Management of systems cover various areas. One such example is the Technology that you are dealing with in your profession/business. Technology gets upgraded more often than anything else. Hence it is vital for us to keep updated with such advancements, in order to efficiently apply them in our lives and business.

Managing People

Managing people is very crucial when we want to succeed in our life. No matter what our profession is, no matter what our business is, unless we equip ourselves to manage people, we can't have an edge in our profession/business. Though we should be friendly and kind towards others, we also need to be in a position to understand the tactics so that none gains an undue advantage over us. By managing people well, we can create a good network which will give us a good amount of information. We all know, information brings business to us. Therefore management of people is vital to create good business opportunities for us.

Conclusion

In the remaining part of the book, the author discusses various things such as overcoming fear, laziness, bad habits and arrogance. Bad habits not only represents smoking or consuming alcohol but also lavish spending in the financial context. When one doesn't know/ care to spend wisely, all his earnings would go in vain and he will never come out of the rat race. It is important to spend wisely as taught by rich dad. Irrespective of age, qualification, and other such criteria, we should be open for knowledge and information from anyone and everyone. By this, we will overcome our arrogance. Only by overcoming arrogance, we get good business opportunities.

The author then gives steps to develop ourselves. Few of them are: * Choosing our association carefully * Master one particular knowledge and then step out for next * Improve self discipline * Give enough to others: Brokers and middle-men. Only by giving well, we get good return. * Buy assets first, then from the income generated out of such assets, buy luxuries. * Teach others what you know. Only then you will receive new information. * Always look for new ideas for investments.

In this series of “Book Summary: Rich Dad Poor Dad”, I tried to summarize the teachings of rich dad of Robert. T. Kiyosaki, the author of the book. Though coming from a middle-class background, the author from the age of nine took lessons from his friend Mike's dad (Rich Dad) and got out of the so called rat race and is financially independent now. The author portrays those lessons in the book, which I'd recommend everyone to read, who wish to manage their finances well. This book is a perfect start for those wishing to gain financial knowledge. Will come up with some fresh and informative articles in the upcoming weeks, so that our financial journey remains heated. Happy learning until then.

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In the previous week's article we covered some essential teachings of Mike's Dad. Mike is the friend of the author, Robert. T. Kiyosaki. Mike's dad is referred to as Rich dad in the book “Rich dad Poor dad”. Rich dad doesn't have any official educational degree, but always stressed on gaining professional education. Nowhere in the entire book, author quotes any lesson from rich dad which defames the formal education. Speaking about the education, rich dad takes a good stand in the same. We will have this article which summarizes the lessons of rich dad regarding Education and Cashflow.

Education

The topic education is discussed a lot in the book and referred to in many places. The author clearly makes few statements regarding the same so that no reader is mislead. One of the fundamental ideology of rich dad is that, the school education must be the starting point for the knowledge hunt for everyone and not finishing point. He feels that many end up with the school knowledge failing to expand their knowledge from there. Schools must be the place where people should start gaining financial knowledge. Unfortunately it is not the case in contemporary scenario. The lessons about money, cashflow system, finance must start right from the schools. By this, everyone gets a good grip in handling their finance well, right from their childhood.

It is not just acquiring wealth makes a person rich, but the knowledge of managing them does. A small pot is much efficient than a big pot with a hole. The ignorance about the nature of money makes us the big pot with hole. To understand the nature of money, it becomes vital for us to understand the concept of cashflow.

Cashflow

In the accounting jargon, cashflow means the “inflow and outflow of cash, from and to a person/ business.” The same applies here. The author goes a step further and asks us to notice the source of our inflow and the way we expend it. As mentioned in the last week's article, we all have “Earned income” which comes from a regular job. Let's assume that this is our primary source of income that we have at our disposal. In general, money can be disposed in two ways:

• Consumption
• Investment

The money is spent for our needs and wants which doesn't result in further cash generation directly/ indirectly is known as “Consumption.” Every purchase we do for our personal use is a consumption. Whereas, the money spent on acquiring assets which results in further cash generation directly/ indirectly is known as “Investment”.

The nature of asset and liabilities was discussed in the last week's article. Anything that puts money in our pocket is an asset and anything that takes money out of our pocket is a liability. It is always important to keep in mind the nature of asset and liability in order to have thorough understanding of cashflow.

Having understood the concept of consumption & investment and asset & liability, we now get into the teaching of rich dad. The author makes a comparison of cashflow between a rich man, middle-class man and a poor man based on their income statement and balance sheet. Income statement shows the income and expenditure for a person. Balance sheet shows the financial position of a person. The asset acquired and liabilities accumulated are listed down in the balance sheet.

The inference is illustrated in the following diagrams:

Cashflow of a Poor Person

_{^{(Image as originally illustrated in the book. Credits: Author of the book)}}

It is evident that the earnings of this person is just enough to meet his consumption. The way out from this situation is to have multiple regular income temporarily. With the additional earned income, one may acquire assets which will gradually increase his passive and portfolio incomes.

Cashflow of a Middle-Class Person

_{^{(Image as originally illustrated in the book. Credits: Author of the book)}}

In the cashflow of a middle-class person, he purchases liabilities which he thinks to be asset. As we all know, liabilities take money out of our pocket. Since liabilities are purchased our expenses increase to a great extent. Due to ignorance of our financial knowledge, we tend to overlook such things. One such purchase is a house. A house bought for our personal living with 0 investments forms a big liability for us. In order to escape from this, the person must consider in acquiring assets. By acquiring assets, the passive and portfolio income will increase which should equal his other expenses. Once, the person achieves this stage, that is, having passive and portfolio income equal to that of his expenses, he is about to get out of the so called Rat-Race and can make proportionate consumption. Until reaching this stage, the person must watch out his spending and shape it well.

Cashflow of a Rich Person

_{^{(Image as originally illustrated in the book. Credits: Author of the book)}}

Rich person, in the earlier stage of the life tend to purchase assets to a great extent. This would have increased his passive and portfolio income. A rich man has sufficient income just from his acquired assets, to meet his expenses and still has money left for further investments. It is in this stage, the person is completely out of the Rat-Race. However, it should be noted that, even though a person is out of rat race, he should make proper investments and generate income out of that before making a lavish consumption.

Conclusion

Right knowledge acquired in finance with right action can make a person rich and get him out of the rat race. Having understood the author's take on financial education and the concept of cashflow, I hope everyone can now differentiate the assets and liabilities that we have acquired and accumulated in our lives till now. Let's have this lesson in mind while we make our further moves in wealth creation and consumption. We will cover some of the other teachings of rich dad in the next week's article. Happy reading until then.

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