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Your take-home salary might see a cut from April 2021. Here's why

Centre has come out with new compensation rules as per new Code on Wages

corona-paycheck-layoff-unemployment-salary-cut-employee-economy-COVID-19 Representational image | Shutterstock

Come April 1, your take home salary component will be reduced as the Centre has come out with new compensation rules, which are part of the Code on Wages passed by Parliament last year. The new rules become effective from next financial year. The Wage Code 2019 focuses to increase the social security benefits for employees.  

Wage Code 2019

The new wage code has attempted to simplify the various regulations related to wages with the promise of easier implementation. 

According to the new wage definition under Wage Code 2019, in effect, at least 50 per cent of the gross remuneration of employees should form the basis to calculate benefits such as gratuity, retrenchment compensation and provident fund, etc in situations where the sum of basic salary and other fixed allowances (such as dearness allowance) is less than 50 per cent of the gross remuneration. Allowances cannot be more than 50 per cent of the total compensation. As a result, the basic pay (in government jobs, basic pay plus dearness allowance) will have to be 50 per cent or more of total pay from April, various media reports state.

What are the changes?

The new wage code is a part of four labour codes that resulted from the merging 29 out of the 44 central government labour laws. The existing acts that governed the employees’ provident fund (EPF) and gratuity will now be part of the Code of Social Security. However, the calculation of an employee's provident fund will depend on the new definition of wages as per the new Code of Wages, 2019.

Employers deduct 12 per cent from an employee's salary toward EPF contribution. For this, your employer takes into account your basic pay and dearness allowance. The employer then matches this contribution by depositing another 12 per cent. However, to limit the impact of EPF contribution, many employers prefer to restructure the salary in such a way that your basic pay remains low, while allowances are substantially higher.

Currently, most of the companies keep the non-allowance part of employee's pay package less than 50 per cent. 

However, with the new wage code, companies will have to restructure the pay packages of most of the employees by increasing the basic pay of employees to meet the new requirement. It says that if your (salary) exclusions are more than half of your total salary—then the excess over the 50 per cent-mark must be included in the wages—based on which your EPF will be calculated.

The revision will result in reduction in take-home pay as provident fund (PF) contribution of most of the employees will go up. PF is calculated as a percentage of basic salary.

How will firms be impacted?

In addition to restructuring the pay packages, it will have significant cost repercussions for firms. As the base to calculate PF and gratuity increases, employers will have to increase their workforce cost. This is in addition to a one-time cost increase for employers to audit their current base of employee pay structure and align with the new system and rising compliance cost burden. 

Firms will also see an impact is the increased gratuity cost. Currently, it is calculated on 15 days of basic pay and dearness allowance. Now, with the new calculation, gratuity will have to include the other allowances of wages such as travel, special allowance

Are there benefits for employees?

With more sum deducted towards social security kitty as well as post-retirement gratuity, the scheme will prove beneficial to employees in the long run. However, while the new wage code is set for an April rollout, clarity is yet to emerge on many provisions. 

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