The relief package for households doesn’t bring relief in the long term

With the lockdown extending well into the fourth phase, the Indian economy has taken a huge battering and so have our salaries and income. From salary delays to pay cuts to furloughs to job cuts, most of us are experiencing the pain in some form. The government and the central bank have been announcing measures to alleviate the pain of the households, but largely, these measures address the immediate liquidity needs, if at all, and can be counter-productive in the long run.

Take the case of the three-month loan moratorium that allows you to take a break from paying your equated monthly instalments (EMIs). No EMIs mean more money in your hands in those three months, but in effect, it increases the interest cost because taking a break from paying EMIs means extending the repayment period and, hence, paying added interest. The relief measure announced by finance minister Nirmala Sitharaman on 13 May doesn’t help you in long run either. For the households, there were two major announcements: a reduction in the Employees’ Provident Fund (EPF) contribution rate from 12% to 10% for three months and reduction in TDS (tax deducted at source) and TCS (tax collected at source) rates by 25% for FY21. Both are temporary breathers and it would do you good to not set much store by it.

Take the case of EPF contributions. Every month, you contribute 12% of your salary (basic pay plus dearness allowance) to the EPF. Your employer matches the contribution. So, in all, every month 24% of your salary goes to the EPF, which by far is the best debt vehicle for long-term wealth creation. Even at a time when other debt products—Public Provident Fund (PPF) is giving 7.1%—are caught in the downward trend of interest rate cycle, EPF has announced a rate of 8.5% for FY20 (the rate is yet to be notified though). This difference when compounded over the long term can leave a lot more in your hands. But in order to give you some liquidity relief, the rate of contribution has been brought down from 12% to 10% and this means only 20% (instead of 24%) of your salary will now go to EPF for three months, thereby increasing your take home pay but not by 4% but by 2%. There is relief for the employer too.

But in your case—the employee—the liquidity relief is marginal and limited to three months: remember the pandemic is not a three-month problem but more long term. However, a dip in your contributions to the EPF now can dent retirement corpus later. Let’s look at some quick back-of-the-envelope calculation. Let’s assume you earn `12 lakh a year or `1 lakh a month (basic pay plus dearness allowance) and contribute `12,000 to your EPF and your employer contributes `12,000 (the calculation doesn’t factor leakage to the Employees’ Pension Scheme or EPS). But for three months, you and your employer would be contributing `10,000 each and so your EPF would get `12,000 less. At a rate of 8.5% and assuming you have 25 more years to work, this could have compounded to a corpus of around `92,000—something you forfeit with the reduced rate of contribution. And then there are taxes to factor in as well as more take-home pay means more taxes (For more on this read bit.ly/2Tc7e6E).

Unlike the previous relief, where subscribers were allowed to withdraw from the EPF corpus—lower of three months’ salary or 75% of the EPF balance—the reduced rate of contribution is not optional and that, perhaps, is the biggest sore point. Even if you are managing to stay comfortably afloat financially, your contribution will take a cut. It does, however, help the employer a great deal, but could have helped both if this was optional at least for the employee. But the good news is you can always bump up your contribution using the Voluntary Provident Fund. However, it may not be possible for many employees if their employer allows such a bump up only once a year (Read more bit.ly/366vY5v).

In the same vein, a reduction in TDS and TCS rates by 25% doesn’t lower your tax liability, but only puts more money in your hands for the time being. For more read bit.ly/2Tdeu27.

So how should you see these relief measures? See them as a stop-gap arrangement to be used only in dire circumstances as they do no good in the long term. In fact, taking a leaf from Prime Minister Narendra Modi’s speech, a better way to combat the financial strain would be to become self-reliant or aatmanirbhar. This is a time to go back to personal finance 101 and start with taking stock of your cash flows. Your income has gone down, but so has your expenditure. Reconcile the two and if you have money left, use it to create an emergency corpus: remember the impact of the pandemic on our financial lives is still playing out. If your expenses overtake your income, stop fresh investments and manage the household expenses. Remember to put a brake on all the unnecessary expenses. If that too doesn’t help, then look at liquidating a portion of your investments like dipping into the EPF kitty. Avoid leveraging as much as you can, and if you do end up with more money in your hands, don’t increase your expenses correspondingly.

Deepti Bhaskaran is editor, personal finance