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The Parliament showed the green flag to the Code of Wages in 2019 and rationalized 44 central labor laws. The most important prospect in this was the new Wage Code. The new Wage Code determines that the allowances given to an employee should not exceed more than 50% of the total cost to the company (CTC). This clearly defines that now the basic pay of an employee would be equal to 50% of the CTC. This Wage Code will be applicable from April 2021.
Currently the wage of an employee, structured by the employer in such a way that the employees get more money as allowances and less as basic wages. This ensures that the take-home salary is more and that contribution to PF (Provident Fund) and gratuity is less.
More PF And Gratuity For Employees!
The new Wage Code Will be applicable from April 2021. That means from the next financial year, 2021-22, it will mandatory for the companies to increase the basic pay of their employees. Well, you might be surprised to know that the new wage code will ultimately reduce your take-home salary, but at the same time will increase your contribution to PF (provident fund), which means it will surely make your retirement corpus strong.
Understand the whole scenario through example.
As per the current wage code, 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.
As per the new wage code, 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 percent 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.
The new wage code has no provision that makes it mandatory for the employers to increase the salary of their employees but the way the new wage code has been structured, it will ultimately end up making employers increase their employee’s salary.
What An Employee Should Do?
Well, as of now, employees need not much think about, as the government has still to notify the rules to implement these four new wage codes. The rules have been finalized by the Ministry of Labor and Employment and may be notified soon, paving the way for the implementation of the labor reforms.
Also, the government through its rules must clarify the fact that whether the new requirement of basic pay is 50 percent of your CTC applies to only those whose salaries are up to Rs 15,000 or everyone above the board.
Let me make you clear that the new code on wages was passed by the Parliament in the year 2019, while the other three codes were approved by the Lok Sabha and the Rajya Sabha in the year 2020.
What Experts Has To Say About This?
Rachit Sharma, DGM, Taxmann, said that “With the implementation of the Code employers will have to revise the salary structure by providing at least 50 percent of the salary in the form of basic components”.
While Pooja Ramchandani, Partner, Shardul Amarchand Mangaldas & Co., expressed her views regarding the new wage code for those with a salary higher than Rs 15000. She said, “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 the calculation of gratuity may change, as there is no such limit for the 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”.
Conclude!
After analyzing the new wage code one can easily say that despite no benefit of take-home salary, the new wage code will make sure that the retirement benefits of employees are certainly improved. This is because small increases in PF contribution will surely help employees build a good corpus in the long term.
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