New Labor Code: Is it beneficial or harmful? No one will explain this new calculation...
Salary and PF Calculation: The new labor laws recently implemented in the country are set to bring significant changes to the lives of millions of employed people. The new labor codes, enacted nearly five years ago, have replaced 29 previous labor laws. The new laws include several major reforms, including appointment letters, minimum wages, overtime, and social security. The reforms under the new labor codes will also impact the provident fund (PF) of millions of employees. It is being reported that this will increase their PF. However, it will also impact their in-hand salary, or take-home salary, which is expected to be lower than before. To understand why this is being said, one must understand the complete calculations before and after the changes.
What has changed in the new labor code...
Following the implementation of the new labor codes in the country, new rules regarding the basic salary of employees have come into effect. An employee's basic salary must be at least 50% of their total CTC, or cost to company, while allowances cannot exceed 50% of their total CTC. Since provident fund (PF) and gratuity are calculated based on the basic salary, their amounts also fluctuate according to the basic salary.
Many companies have been engaging in manipulation.
A large portion of the PF contribution comes from the employee's salary, while the employer also has to contribute a portion. 12% of the employee's basic salary (basic + dearness allowance) goes into the PF account, while the employer company also has to contribute the same amount. Of this 12% contribution, 3.67% goes directly to the employee's PF account, while 8.33% goes to the Employees' Pension Scheme (EPS).
Until now, many companies have deliberately kept the basic salary low and allocated the remaining amount as various allowances to reduce their PF and gratuity expenditures. Now, under the new laws, companies will have to contribute more. The employee's PF contribution will increase, resulting in a higher retirement income.
Now, consider the old calculation:
An employee contributes 12% of their basic salary + dearness allowance (DA) to the PF account. This entire amount goes into their PF account. This amount is deducted from their CTC to determine their take-home pay, or in-hand salary. Let's assume Rahul Kumar works for a company. His CTC, or gross salary, is ₹60,000. In this, his basic salary was fixed at Rs 20,000; the remaining Rs 40,000 was given to him in special allowance and other items. So, initially, the amount going into his PF account was fixed at this Rs 20,000. That means, 12% of his salary of Rs 20,000, i.e., Rs 2,400, went into his PF account.
The employer company also deposited the same amount of Rs 2,400 in his PF account (3.67%) and NPS account (8.33%). That means, it deposited Rs 734 (3.67%) of Rs 20,000 in his PF account, while Rs 1,666 (8.33%) of Rs 20,000 was deposited in his pension account.
