What does the new salary rule mean for your personal loan eligibility?

Until recently, employers had the freedom to design the salary structure to maximise take-home pay. However, a new salary rule has now been introduced in India that may affect your take-home income going forward.  

It’s important for all salaried individuals to understand the impact of this change on all aspects of their professional and financial lives. For now, let’s go through how this change can impact your personal loan eligibility. 

What is the new salary rule?

Under the new salary rules, basic salary, including dearness allowance and retaining allowance, must constitute at least 50% of a person’s total salary. Earlier, employers had the freedom to design a salary structure with a lower basic salary and higher allowances. What this did was:

• Increase your take-home salary, as basic salary could be as low as 30-40% of the Cost-to-Company (CTC)

• Reduced your mandatory contributions like the Provident Fund (PF) and gratuity, which are calculated based on your basic salary

Now, with the new salary code in place, the immediate effect of the change includes:

• Basic salary will constitute at least50% of total compensation

• Allowances will automatically reduce

• Contributions to PF will increase

The impact of these changes on your personal loan eligibility is twofold. While there are a few positives, a lower take-home salary may reduce the amount of loan you’re eligible for.

How can a higher basic salary improve personal loan eligibility?
 

A higher basic salary improves your financial profile, thereby enhancing your personal loan eligibility. This is because a lender typically considers:

• Your stable income components

• Your job stability

• And your monthly salary structure

As basic salary is a stable component of your salary, its increase can:

• Improve your credibility as a loan applicant

• Increases the chance of loan approval

• Increase your personal loan eligibility

A personal loan eligibility calculator with detailed salary inputs will help you identify the effects of changes in your salary structure on your borrowing capacity.

How does a lower take-home salary impact your personal loan eligibility?
 

The flipside of a hike in basic salary is that it lowers your allowance component and increases your mandatory deductibles. Therefore, your take-home salary will decline. Don’t worry, the difference amount remains secured in the form of PF and gratuity.

However, a lower take-home salary means that you now also have a lower EMI capacity. This can negatively impact your personal loan eligibility, as your EMI repayment capacity is one of the main factors that determine your loan amount and eligible tenure. 

What does the salary rule mean for loan assessment?
 

So far, we have studied both the positive and the negative impact of the salary rule change on personal loan eligibility. For a lender, a loan assessment is not about any single factor. The approval criteria for a personal loan include:

• Gross salary vs net salary

• Debt-to-income ratio

• Credit score

• Employment duration and type

• Existing liabilities and EMI burden, etc.

Irrespective of what your new basic salary is, repayment capacity holds the key in loan assessments. You can use a personal loan eligibility calculator and find out your eligible loan amount before applying.

How is the EMI calculation affected?
 

Lenders prefer to approve loans to borrowers whose EMI burden is not more than 30-40% of their net monthly income. A reduced take-home salary means that the EMI threshold will decrease. However, a higher basic salary may mean longer repayment terms and structured repayment options. 

To understand the mixed impact of the new salary rule on personal loan eligibility, let us consider the following example:

Salary structure, personal loan eligibility and repayment capacity comparison of a person whose:

• Total annual salary is ₹10,00,000

• Has no other liabilities

• Lender’s EMI threshold is 40% of net monthly income  

Salary structure comparison:

Eligibility and repayment capacity comparison: 

Summing up the impact

Based on the various impacts of the salary rule change on personal loan eligibility, we can conclude the following:

• The earlier scenario allowed a higher take-home, which meant better EMI affordability and, therefore, better loan eligibility

• The higher basic salary improves your financial profile, but marginally reduces your net disposable income 

Why consider FIRSTmoney personal loan to meet your personal financial needs
 

IDFC FIRST Bank FIRSTmoney personal loan offers flexible loan amounts based on your profile, at competitive interest rates starting at 9.99% p.a. It also offers customisable repayment options, including a wide range of repayment tenures from 9 to 60 months. Its quick processing means that you are never too far away from your eligible loan amount. Once approved, IDFC FIRST Bank disburses the approved personal loan amount within just 10 minutes.

Moreover, IDFC FIRST Bank’s FIRSTmoney charges no foreclosure charges, allowing you to close your loan at your convenience directly via the app. You can also enjoy zero processing fee& on select loan amounts.