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The Code on Wages, one of the four labour codes that is expected to come into force this year, may not necessarily result in higher provident fund contributions for employees, experts said.
The four codes that also cover occupational health, social security and industrial relations, which were passed by Parliament in 2019 and 2020, will together have a significant impact on key aspects of employment such as working hours, leave, and most importantly, pay packages.
Notification awaited
“As things stand, the basic codes have been approved and are Acts. However, they can be implemented only after the Central government notifies the codes,” explained Saraswathi Kasturirangan, a partner at Deloitte India.
Until all the boxes in the sequence are ticked, companies will not have clarity on the way forward. “The states also need to be ready with their codes... if one set of rules gets notified at the Centre without the other being ready at the state level, it will create confusion,” said Preeti Chandrashekhar, India business leader for health and wealth at Mercer. “So far, 29 out of the 36 states/Union Territories have notified the draft rules for the Code on Wages, while 20 of them have notified the draft rules for all four codes.”
The codes will be implemented in 2022, minister of state for labour and employment Rameswar Teli said in an interview to Moneycontrol in February.
Higher 'wages'
One of the most significant changes that the Code on Wages will bring about is in the definition of wages.
“At present in private organisations, basic salary is typically 25-40 percent of the total cost-to-company (CTC). Once the new code comes into force, wages for the purpose of retirals need to be at least 50 percent of the total remuneration,” said Kasturirangan. This could impact provident fund contributions and gratuity computation.
PF contribution
However, this is not necessarily so for all employees. If the basic salary is over Rs 15,000 a month, the
contributions to provident fund could remain unchanged, experts said.
“As long as the wages, for the purpose of provident fund, are more than Rs 15,000, which is the statutory wage ceiling, the employer is not under an obligation to contribute on higher wages. So, your existing PF contribution may not change (in such cases),” said Kasturirangan.
Whether the PF contribution – and thus, the retirement fund – goes up, resulting in a lower take-home pay, could finally boil down to a company’s policies.
“The impact on the employee’s take-home pay would depend upon the current wage structure and on whether the company restricts the PF contribution to the wage ceiling of Rs 15,000,” said Chandrashekhar.
In any case, employees will not be in a disadvantageous position, according to Rituparna Chakraborty, cofounder of TeamLease Services, a placement company. “Many corporates have already factored in these likely changes in the increments that were handed out at the beginning of this financial year,” Chakraborty said.
Impact on gratuity
Gratuity is calculated as a percentage of the last drawn salary and the number of years of service, but can be limited to Rs 20 lakh per employee.
“Since the wages as per the codes is higher, gratuity pay-out will also be correspondingly larger,” said Kasturirangan.
However, there’s a catch in the case of organisations where gratuity forms a part of the total CTC. “This is because the resultant increase in gratuity liability of the organisation will be adjusted against other heads such as special allowances, which will see a dip in such cases. So, employees’ in-hand salary could actually come down in cases of organisations where CTC includes gratuity,” she added.
