The worry of salary reduction is over! The new labor code will not affect employees' take-home pay, the government has clarified..

For some time now, employees have been worried about the new labor code: will their take-home salary decrease? Social media has been abuzz with the fear that an increase in basic salary will lead to a corresponding increase in PF deductions, ultimately reducing their take-home salary. This means that the salary structure change will reduce the amount received.

But now the Labor Ministry has clarified that this will not happen. As long as PF calculations remain within the ₹15,000 limit, your take-home salary will remain unaffected.

Why so much confusion among employees?
The new labor code stipulates that an employee's salary, including basic salary, DA, and retaining allowance, must comprise at least half (50%) of their total salary. Previously, many companies kept the basic salary portion very low and allocated the entire amount to allowances to reduce liabilities like PF.

Now, if an employee's allowances exceed 50% of their total salary, that amount will have to be added back to the basic salary. This is why employees believed that as the basic salary increased, the PF deduction would also increase, reducing their take-home salary.

The Labor Ministry clarified that there will be no reduction in take-home salary.
The government has clearly stated that the new labor code will not affect take-home salary. PF is still calculated based on the statutory limit of ₹15,000. This means that whether your basic salary is ₹20,000 or ₹30,000, the mandatory PF deduction will only be made on ₹15,000. This limit is an old EPF rule, and both the company and the employee must adhere to it. PF deductions above this limit will only be made if both the employee and the company agree to it.

The Ministry of Labor explained this with an example involving a salary of Rs. 60,000, making it easier to understand...

Let's say an employee's salary is Rs. 60,000.

Basic + DA = 20,000

Allowances = 40,000

According to the new Labor Code, allowances cannot exceed 50 percent of the total salary. Here, the allowances are very high, so Rs. 10,000 is added back to the basic portion. Thus, the basic amount becomes Rs. 30,000 on paper. However, PF calculations will still be based on Rs. 15,000.

Company's PF = 12 percent of 15,000 = 1,800

Employee's PF = 12 percent of 15,000 = 1,800

PF was deducted at the same rate before, and it will continue to be deducted at the same rate now. This does not change the take-home salary at all; 1,800 + 1,800 from 60,000 will reduce it to 56,400.

The new labor code simply makes the salary structure clear and consistent. The ratio of basic and allowances is correct, which ensures better benefits like PF, pension, and gratuity in the future. However, as long as the PF calculation is based on the 15,000 rupee limit, there is no impact on take-home salary.

Why is a PF limit necessary?

This limit of Rs 15,000 (PF ceiling) determines the PF contribution limit for both the company and the employee. If this limit were not in place, the PF contribution would automatically be reduced after the basic salary increase, reducing the employee's pay. This limit protects employees and keeps their take-home pay stable.

What are the demands of labor unions?
For many years, labor unions have been demanding that this PF limit be increased so that both their PF and social security benefits can increase over the long term. This limit was increased from Rs 6,500 to Rs 15,000 in 2014 and has remained unchanged since then.

The government clearly states that employees need not worry at this time. The new labor code simply makes the salary structure clear and uniform. The balance between basic and allowance is good, due to which facilities like PF, pension, and gratuity are available well into the future. But as long as the PF rule remains within the limit of Rs 15,000, there is no impact on the take home salary.

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