-Jay Patel
If you are working for a private company as a salaried employee the below explanation is much needed for you.
The take-home salary of employees working in private companies will reduce from April 2021 because of the new salary structure.
The four broad labour codes on wages, industrial relations, social security and occupational safety, health and working conditions (OSH) have already been notified after the President’s approval, subsuming 44 central labour laws.
The Code on Wages was passed by Parliament in 2019 while the three other codes got clearance from both the Houses in 2020. The Ministry of Labour and Employment has now finalized the rules under these codes, paving the way for their implementation.
The Normal Situation Earlier: Usually, most companies keep less than 50 per cent of the non-allowance part of the employee’s salary so that they have to contribute less to EPF and gratuity and reduce their burden. Currently, most employers have a wage structure in which the basic salary ranges from 25% to 40% of the CTC of the employee, and this forms the basis for both provident fund and gratuity contributions.
Aiming more streamlined structure: The Code on Wages has been introduced aiming to streamline and simplify the existing labour laws. It was passed by parliament in 2019. The Code will subsume the four labour laws – Minimum Wages Act, Payment of Wages Act, Payment of Bonus Act and Equal Remuneration Act. After its enactment, all these four Acts would be repealed.
The code which is expected to be kicked in from 1st April 2021 (not implemented yet) introduced significant changes and one of those is the expansion in the definition of the ‘Wages’.
First of all, the important thing to know is the definition of wages. Wages means “all remuneration” payable to an employee and includes basic Pay, dearness allowance and retaining allowance but does not include bonus, contribution to PF and pension, HRA, conveyance allowance, overtime, gratuity etc.
The new wage code mandates that basic pay will have to make up 50 per cent of employees’ CTC. Allowances to employees, like leave travel, house rent, overtime and conveyance, will have to be limited to the remaining 50 per cent of CTC. If any of these exemptions, in aggregate, exceed 50 per cent of the CTC, the extra amount will be deemed as remuneration and will be added to the wages.
After Effect: After the new pay code is implemented, companies will have to increase the basic salary. This will reduce the take-home salary of employees, but increase PF contributions and gratuity contributions. Also, the employee’s tax liability will be reduced, as the company will add its PF contribution to the employee to its CTC (Cost-To-Company).
Meanwhile, gratuity will undergo certain changes too as per the new wage code. Under the new definition, gratuity will have to be calculated on the basis of a larger base, including basic pay as well as other allowances of wages such as travel, special allowance, etc. This will add to the gratuity cost of companies.
An example: Let’s suppose your current salary is Rs 1 lakh a month, and the basic salary is Rs 30,000. That means, your salary reaches 1 lakh by taking into account allowances, etc. So, the employee and the company contributed PF at 12-12 per cent or Rs 7,200. So,your take home salary before tax is Rs 92,800. We are here assuming that there is no other deduction.
When the new wage rule or pay rule comes into force, the basic salary will go up to Rs 50,000. Therefore, the total PF contribution will be Rs 12,000. So, the take-home salary before tax will be Rs 88,000 a month, which is Rs 4,800 less than the previous salary. This Rs 4,800 has gone to your PF account.
In the long run, it will be beneficial for employees who would get more money at the time of retirement (which also includes higher contributions from employers). The consequent enhanced contribution to the provident fund shall prove to be beneficial for employees at the time of retirement as there will be more pay-out.
