Before! let’s understand a couple of terms that will help us to understand the other side of the salary hike.
Salary hike – The amount a salary is increased on year to year basis. Let’s understand how it’s calculated:
- Pre year salary = 50,000
- Hiked salary = 55,000
% Increase = (55,000 – 50,000) / 50000 = 0.1
In percentage = 0.1 * 100 = 10%.
Inflation I .e. increases in the price of goods & services with time, effectively decreasing the number of goods and services you can buy with a rupee in the future as opposed to a rupee today. What was worth 100 rupees last year is probably worth 105,110 or even 120 next year? Inflation eats away your savings bit by bit by reducing the purchasing power of money.
Historical salary hikes & inflation in India
The 24th annual Salary Increase Survey by professional services firm Aon finds that companies in India will give an average pay hike of 9.1 percent in 2020, the lowest in the decade.
At the same time, consumer inflation in India hitting a high of 7.61%.
What does it mean to a common employee?. A lot by the way!
Let’s understand with an example: Assuming an employee receives a 9.1% salary hike in 2020, a good reason to be happy! in such an unprecedented situation. Inflation of 7.6% in the same year means the purchasing power of money will do down by 7.6%. This reduction in purchasing power needs to be subtracted from the salary hike to arrive at a salary hike in real terms.
I. e. Real salary hike = Salary Hike (%) – Inflation (%) = 9.1% – 7.5% = 1.5%.
Real salary hike = 1.5%. Wait, It’s not over!
Now, it is the government’s turn! Govt collects tax from you as per the revised salary structure and slab you fall upon. You will end paying whatever positive figure is left from a real salary hike in the form of tax.
Your feeling of “even after a salary hike, nothing in the hand at the end of the month, is not completely false at all”.
Yet, all of these when you receive a salary hike which is more than inflation in-country at that time. otherwise, your present salary will be contracting relative to the inflation rate.
