The Union government’s Code on Wages fixes basic pay at 50% or more of the total pay, which could see salaries being restructured.

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Money Salary Thursday, December 10, 2020 - 14:46

The take-home pay of salaried employees could potentially decrease from the start of the new financial year, but it’s not all bad news. The new pay will apply from the next financial year once the Union government notifies its draft rules under the Code on Wages.

As part of the compensation rules under the Code, which comes into effect from April 1, 2020, the basic pay will have to be 50% or more of the total pay. This is because allowances are capped at 50% and companies will have to ensure that the basic pay is above 50%. However, it is important to note that provident fund (calculated as a percentage of basic salary) and gratuity will both go up. The gratuity amount is calculated at 4.81% of an employee’s basic salary.

In effect, while the current take-home salary may see a reduction, employees’ retirement corpus will increase. The provident fund contribution of both employees and employers will go up.

Usually, in most companies the non-allowance part of the salary is less than 50%, and allowances are higher. Common allowances include house rent allowance, dearness allowance, leave travel allowance, conveyance allowance and medical allowance.

“The labour code indicates that if the ‘wages’ bucket falls below 50% of the remuneration, then some portion of components excluded from the ‘wages’ bucket will be added to it so that this bucket becomes at least 50% of the remuneration for the purpose of calculating different payments such as social security contributions, gratuity, leave encashment, etc,” Anshul Prakash, partner (employment labour and benefits) at Khaitan & Co told Mint.

Since the new rules will lead to salaries being restructured, employers will see their employee costs increase as well. Prior to this, as allowances make up a large part of the salary, the contribution to PF and gratuity (both calculated on basic pay) was limited.

“The new definition of wages in some cases could increase the financial burden on the employers in light of the enhanced wage payout and social security contributions. This is likely to drive employers to revisit their wage structures to appropriately balance the components,” said Pooja Ramchandani, partner at Shardul Amarchand Mangaldas & Co, to the Economic Times.

It is important to note that while the Code on Wages was passed by the Parliament in 2019, the government is yet to notify the rules for the Code.

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