New labour code: Rules have changed, could your take-home salary decrease? Understand the complete rules of the new labour code and the old PF law..

New Labor Code: November 21st marked a major change for working people in India. After a long wait, labor reforms have been implemented in the country. With the implementation of four new labor codes, a historic shift has occurred in the country's social security framework. The Code on Social Security, 2020, has replaced old laws like the Gratuity Act and the ESI Act. Its scope is now so broad that it also covers gig workers and migrant laborers. Furthermore, the eligibility for gratuity for fixed-term employees has been reduced from five years to just one year. However, amidst this major change, a problem has arisen that has both employers and employees worried.

New codes have arrived, but suspense remains over PF
It was hoped that the old EPF Act of 1952 would be abolished with the new codes, but that did not happen. The Social Security Code was supposed to incorporate this, but no official notification was issued repealing the old law.

That is, the new definition of salary applies to gratuity and ESI, while the Provident Fund (PF) calculations are still based on the old law. This has led to a system where the same employee's salary is calculated differently for different benefits.

Is your salary slip about to change?
The root of this entire confusion is the rule of the Code on Wages, 2019, which completely changes the salary structure. According to the new rule, an employee's Basic Pay (Basic Pay) + Dearness Allowance (DA) + Retaining Allowance must together constitute at least 50% of the total salary. If this figure is less than 50%, the remaining allowances must be added to bring it up to 50%.

The problem is that PF still operates under Section 2(b) of the old Act, which has a very limited definition of "basic wages." It excludes items like HRA, bonuses, and commissions. Companies are now in a dilemma: they have to follow the 50% rule for gratuity and ESI, but the old rule remains in effect for PF.

Companies face a double challenge.
This change can directly impact your income tax. Employees under the old tax regime save tax through allowances like HRA and LTA. If companies merge these allowances with basic salary to meet the 50% rule, employees' taxes could increase, and their take-home salary could decrease.

To address this problem, many companies are adopting a middle path. They are retaining allowances on salary slips to save tax, but are internally considering these allowances as "notional" salary for PF calculations. This means the payroll team will now have to maintain two accounts: one for tax and one for PF compliance.

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