With the new Code on Wages becoming effective from April 1, 2021, the private sector employees are likely to have a reduction in their take-home salary. Even though most companies will keep the CTC (Cost to Company) unchanged, the proportions of the salary and allowance components will change to comply with the new rules. The new definition of wages is part of the Code on Wages, 2019 passed by Parliament last year.
As per the new rule, the government has put a limit on the allowances at 50 per cent of the total compensation. It means, that the basic pay (in government jobs, basic pay plus dearness allowance) will have to be 50% or more of total pay from April. Hence in order to abide by the new rule, employers will now have to increase the proportion of the basic pay leading to an increase in the Provident Fund (PF) and gratuity contribution on part of both the worker and the employer. Currently, the PF contribution is 12 per cent for both the employer and the employee.
Tough the new wage code will reduce the take-home salary of employees, their savings as post-retirement gratuity amount will be bigger as gratuity is also calculated on the basis of basic pay, which will go up. Another benefit is that tax liability will also reduce as employers contribution to the employee's PF is not considered as income for the employee.
As per the rules, any change in the compensation of employees has to be mentioned in the employment letter. Hence the employees will get new employment letters from the employers with the new breakups,
Employers will need a restructuring of current offers and compensation structures. Financially, higher deductions towards PF and Gratuity will eventually be borne by the employee.
Along with the Code on Wages, three other codes on industrial relations, social security and occupational health safety and working conditions are planned to be implemented from April 1 next year.