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The Central Government has recently notified the draft rules under the Code on Wages 2019. The new rules which are expected to enter into force in April 2021, will potentially have consequences on your take-home salary and retirement corpus.

What is Code on Wages 2019?

The Code on Wages 2019, which received the President's assent in August last year, is directed at amending, consolidating, and simplifying the laws related to wages and bonuses. It is one of the four labor codes introduced by the government and replaces the Payment of Wages Act, 1936, the Minimum Wages Act, 1948, the Payment of Bonus Act, 1965, and the Equal Remuneration Act, 1976.

Why Your In-Hand Salary May Reduce from 2021

How does the Act define 'wages'?

The Act and the draft rules unify the definition of "wages" and try to simplify the nomenclature. The new definition includes all remuneration in the form of Basic Pay, Dearness Allowance, and Retaining Allowance if any. The definition excludes explicitly any statutory bonus, the value of house accommodation and utilities, employer's contribution to pension/Provident Fund, conveyance allowance/value of traveling concession, house rent allowance, the sum paid to the employee to defray special expenses, overtime allowance, gratuity payment, remuneration payable under a settlement, and retrenchment compensation. The Act mandates that the specific exclusions/allowances can not exceed 50% of total remuneration. In case the exclusions exceed 50%, the excess amount will be deemed as remuneration and shall be added in "wages."

 

How does this impact in-hand salary, gratuity, and PF?

Currently, most private companies keep the non-allowances part of the total remuneration at less than 50% of the CTC, while maintaining a higher share for allowances. However, after the new rules come into effect, the total wages for gratuity and PF calculation have to be at least 50% of the remuneration. To adjust to this, employers will have to restructure the salary and increase the Basic Pay component.

It is to be kept in mind that while gratuity is calculated on the last drawn salary (basic pay+DA), the PF is calculated on the basic pay and DA, when applicable. Employees opting for PF are required to contribute 12% of their basic pay to PF, while the employer's contribution to PF is either 10% or 12%. Since under the new rules, the basic pay is set to increase, the PF contribution will also rise. Consequently, the takeaway salary will decrease. Let us understand this with a simplified example.

Let's take your monthly gross salary to be INR 2 lakh and your basic pay to be INR 50,000. The total PF contribution (yours and your employer's) will be INR 12,000. Assuming there are no other deductions, the takeaway salary before tax will be INR 1,88,000. As per the new rules, the basic pay has to be a minimum of 50%, which will be INR 1 lakh. Now, the PF will be INR 24,000, and your take-home salary before tax will be INR 1,76,000.

It is anticipated that due to the new rules companies will have to increase their costs towards salaries as they will have to contribute more towards PF and gratuity.

 

Thus, though the in-hand salary is expected to reduce, a proportional increase in PF and gratuity will help in improving social security and post-retirement benefits.

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