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Code of Wages: Lower take-home pay today, for a larger retirement corpus tomorrow

The government's new wage code requires basic pay to be 50 percent of your total salary. Provident fund deductions will, therefore, increase.

February 23, 2021 / 10:43 AM IST

The Parliament has approved the code of wages in 2019, to rationalize 44 central labour laws. As per the new wage code, allowances given to an employee should not exceed 50 per cent of the cost to company (CTC). So, the basic pay has to be 50 per cent or more of the CTC from April 2021.

Under the current dispensation, employers structure wages in such a way the employees get more money as allowances and less as basic wages. This ensures more take home salary and less contribution towards the social security schemes as contribution to the provident fund and gratuity is calculated as a percentage of the basic salary.

Employees to get more PF, gratuity

"From the next financial year, it is mandatory for companies to increase the basic pay (to at least 50 percent of the CTC) of employees, which will ultimately result in a reduction of the take-home pay of employees but increase in PF and gratuity contributions," says Kapil Rana, Founder & Chairman, HostBooks Limited.

If the current salary of an employee is Rs 30,000 per month and the basic pay is Rs 12,000, the contribution towards PF by the company and employee both is 12 percent of the basic pay, i.e., Rs 2,880. The take-home pay after deduction of provident fund, assuming that there is no other deduction, will be Rs 27,120.


Under the new format, the basic salary of the employee will increase to Rs 15,000 per month. Consequently, the contribution towards PF by company and employee both will be 12 per cent of basic pay i.e. Rs 3,600. So the take-home pay after reduction of PF will be Rs 26,400 per month which is Rs 720 less than the previous salary.

However, in case the salary is over Rs 15,000, the new code of pay cannot have any effect on salary, unless this threshold limit is changed by new schemes made under the Code. Presently, an employer is required to contribute 12 per cent of ₹15,000 as PF contribution, in case the (basic) salary more than Rs 15,000 under the Employees’ Provident Fund Scheme, 1952.

Although the labour codes do not contain any provision requiring employers to change their CTC structure, it will ultimately result in the restructuring of the CTC to meet the basic pay norms.

"With the implementation of the Code employers will have to revise the salary structure by providing at least 50 per cent of the salary in the form of basic components," says Rachit Sharma, DGM, Taxmann.

COVID-19 has taught people the importance of social security schemes, he says, adding, "during lockdown PF withdrawals were at life-time high. The new wage code would improve the social security of the workforce. It is in the interest of the workforce that the new reformatory labour code is implemented at the earliest."

What should you do?

The Parliament had passed the code on wages in 2019 while the other three codes were approved by the Lok Sabha and the Rajya Sabha last year. All the four codes have already been notified after getting the President's assent.

For now, there is nothing much to do. The government needs to now notify the rules for implementing these four labour codes. The rules have been finalised by the Ministry of Labour and Employment and may be notified soon, paving the way for implementation of the labour reforms. Also, the rules would need to clarify whether the new requirement of basic pay being 50 percent of your CTC applies to only those whose salaries are up to Rs 15,000 or everyone across the board.

“The new wage code may not end-up impacting employers’ PF contribution, where the basic salary is already higher than Rs 15,000, as it is not mandatory for employers to do so. However, other components such as calculation of gratuity may change, as there is no such limit for calculation of gratuity except for the maximum threshold of Rs 20 lakh. So, if the basic salary of the employees goes up under the new wage code, gratuity eligibility will also go up," says Pooja Ramchandani, Partner, Shardul Amarchand Mangaldas & Co.

So, if your basic salary is above Rs 15,000, whether your take-home salary will change or not depends on your employer’s decision as of now. But for most, retirement benefits are certainly expected to improve. Small increases in PF contribution can help you build a good corpus in the long term.

It is to be noted here that since labour is a concurrent subject, state governments, too, would frame certain rules under the four codes.
Ashwini Kumar Sharma
first published: Feb 23, 2021 10:43 am

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