Explainer: How New Labor Code Will Impact Your Salary Structure..
The new Labor Code has brought with it several major changes. One of these is the definition of wages. According to information released by the government on November 21st, wages will now include basic salary, dearness allowance (DA), and retaining allowance. These three components must account for at least 50% of the total salary. Gratuity, pension, and other social security benefits will be determined on this basis. Most importantly, your total gross salary will remain the same.
According to an ET report, the implementation of the new Code on Wages is expected to increase Provident Fund (PF) and gratuity contributions. Consequently, companies will have to adjust their salary structures to accommodate these new rules. Since PF and gratuity are calculated based on basic salary, an increase in basic salary will also increase contributions from both the employee and the company. This will increase employees' mandatory retirement savings, but while CTC remains the same, higher deductions for PF and gratuity will reduce their take-home salary.
Reason for the change?
This provision related to basic salary has been introduced to curb companies that deliberately keep basic salaries low and provide allowances. By doing so, they reduce their contributions to retirement funds and gratuity.
Will salary decrease?
PF contribution is calculated at 12% of the basic salary. Gratuity depends on your last basic salary and the number of years you have worked at the company. Experts say that since PF and other social security contributions will now be deducted at a higher amount (50% of your total salary), your monthly take-home salary may decrease.
Impact on gross salary?
Your total gross salary will remain the same. This change will not affect your total salary (CTC). Companies will only change the internal salary structure so that the basic salary component meets the 50% rule.
Impact on Retirement Fund?
Experts say that while your take-home salary may increase with each hour, your Provident Fund (PF) and gratuity contributions will increase. This means your future and retirement will be more secure.
Who will be affected?
This change will primarily affect employees whose basic pay is less than 50% and whose allowances are higher. Companies will be required to change the salary structure for such employees.
What do experts say?
Suchita Dutt, ED of the Indian Staffing Federation, says that the new labor code will provide better security for retirement through gratuity and PF, but take-home pay may decrease. The reason is that companies may cut allowances to balance costs.
Significant Points
A 50% basic salary is now mandatory to be at least 50% of the total salary (CTC). The 12% PF contribution is calculated at 12% of the basic salary. Higher deductions: Since PF and gratuity are calculated on the basic salary, an increase in basic salary will also increase the contribution of both the employee and the company. Salary reduction: Your CTC will remain the same, but your monthly in-hand salary will be reduced due to higher deductions for PF and gratuity. What will be the benefit: Your monthly salary will decrease, but the benefit will be that your retirement fund (PF and gratuity) will accumulate more than before, which will increase future social security.
How will the calculation be done?
Similar definitions across all labor codes will bring uniformity in the calculation of social security benefits. Anjali Malhotra, partner at professional services firm Nangia Group, said that salary will now include basic salary, dearness allowance (DA), and retaining allowance. 50% (or a percentage determined by the government) of the total salary will be added back to the salary. This will ensure a uniform methodology for calculating gratuity, pension, and social security benefits. Puneet Gupta, partner, People Advisory Services, EY India, said that the implementation of the labor code may increase the amount of gratuity, as it will be calculated on 'salary'. This will include basic salary and all other allowances except HRA and conveyance allowance.
How will companies comply with the rules?
Divya Baweja, Partner at Deloitte India, says that the new definition ensures that allowances like HRA and traveling allowance cannot exceed 50% of the total salary. Therefore, simply increasing the basic salary by 50% will not be sufficient to comply with the rules. Even if a company does not increase the basic salary, depending on the salary structure, the value of 'salary' will still be considered at least 50% of the total salary. According to Vinay Joy, Partner at Khaitan & Co., many companies will change their salary structures and increase the share of basic salary. This will also increase statutory contributions like PF and gratuity in the long run. However, this will mostly impact PF for employees earning up to Rs 15,000 per month, as contributions for employees earning more than this amount are generally limited to the statutory limit.
Disclaimer: This content has been sourced and edited from Zee Business. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.
