India’s Interim Budget 2019 – Changes to Income Tax, ESIC, Provident Funds & Gratuities

On February 1^st, the Narendra Modi’s government presented their interim budget for 2019. This will be the last budget presented by this government ahead of the upcoming 2019 Lok Sabha elections.

This year’s budget focuses mainly on farmers and salaried employees.

Considering the varied salary classes that exist in India, there are multiple changes being introduced specifically around income tax and employee state insurance compliance.

What are the changes?

Presented in the interim budget, there are 4 main areas of importance to note which will be introduced from April 1^st 2019:

• Income Tax
• Gratuities
• Employee State Insurance Compliance
• Provident Funds

Income Tax

The following changes to income tax have been approved by the President of India and will come into effect in April 2019.

1. Full tax rebate to individuals having a taxable annual income up to INR 500,000
   • If an employee has a taxable annual income up to INR 500,000 then they will get a full tax rebate.
2. Standard Deduction is raised from INR 40,000 to INR 50,000
   • (This will provide an additional tax benefit to employees.)
3. No Tax on notional rent of second Self- Occupied House “Income From House Property”

The interim budget 2019 had significant announcements for home buyers, with a proposed exemption levy of income tax on notional rent on the self occupied house.

Gratuities

1. The non-taxable gratuity limit will now increase from INR 1,000,000 to INR 3,000,000.
2. New pension scheme* for the ‘‘unorganised sector’’ (employees not covered under PF, ESI and allied labour acts in India e.g. freelancer, temporary staff, etc.)

• A new pension scheme for the unorganised sector workers with monthly income up to INR 15,000 will be provided. An assured monthly pension of INR 3,000 will be provided after retirement at age 60.

* A final draft and process of the scheme is still pending approval and hasn’t yet been confirmed.

Employee State Insurance Compliance

There is another proposed change in ESIC compliance. However, this is a draft notification and pending confirmation it will be implemented on April 1st 2019.

1. ESIC (Employees State Insurance Corporation) employer and employee share to be reduced by 0.75% respectively.

• The Employer share will be reduced from 4.75% to 4.00%
• The Employee share will be reduced from 1.75% to 1.00%
• This statutory deduction is applicable where employees are over 20 years old with a gross monthly salary of less than INR 21,000

Provident Fund (PF)

Currently, employees are required to contribute the mandatory 12% of their basic salary or wage towards their PF. Other salaries or incomes are shown as different allowances such as: house rent allowance, special allowance etc.

Essentially, the change now means that the PF contribution will be on the total amount including all additional allowances paid to an employee and not just on the basic salary itself.

Definition of wages

As per the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, “basic wages” means all income earned by an employee while on duty, on leave or on holidays with wages in accordance with the terms of the contract of employment and which are paid or payable in cash to him.

However, the Act excludes these two important salaries following from the definition of basic wages or salary:

1. The cash value of any food concession;
2. All cash payments paid to an employee on account of;

• •  a rise in the cost of living
  • house-rent allowance
  • overtime allowance
  • bonus
  • commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment.

What is the Expected Impact?

The impact of this new change could be two-fold.

Firstly, the contribution towards employee’s provident fund will be higher and hence less take-home pay for the employee.

Secondly, the retirement fund will see more inflows as higher monthly PF contribution will move into the employee’s PF account.

Who can I ask for more information?

Immedis are aware of these new changes and are ready to implement there with April’s payslips, but if you would like to learn more about these changes, get in touch to speak to a member of the Immedis team on info@immedis.com

This blog was written by Immedis’ In-Country partner, Payline India.