How New-Wage Code will Impact Take-Home Salary in India?

The government has announced a new wage code bill that will be implemented from April 2021. The bill is expected to reduce employees’ take-home salary while increasing the contribution towards retirement funds. In short, the new wage code bill mandates that the basic pay for an individual must be at least 50% of the total cost to the company (CTC).Read on to find out what the new wage code is and how it will impact salaried individuals.

Before understanding the new wage bill, let’s get a basic idea about CTC. A CTC is a yearly expenditure that a company spends on an employee. It comprises of basic pay and additional benefits such as House Rent Allowance (HRA) , Dearness Allowance, Travel Allowance, Provident Fund, Gratuity, Medical Allowance, Performance Bonus, Professional Tax, among others.As per the new wage code bill, the government has defined wages differently, stating that employers should consider inclusions and exclusions while calculating wages.Following are the inclusions that should be 50% of the total CTC.

• Basic Pay
• Dearness Allowance
• Other Special Allowances

On the other hand, employers should ensure that the following excluded components do not exceed 50% of the total remuneration:

• House Rent Allowance (HRA)
• Bonuses
• Overtime allowance
• Commissions
• Conveyance

The government states that it is mandatory for all employers to increase the basic pay by at least 50% of the CTC. In case the exclusions exceed the 50% limit, they will be added to the ‘wages’ component. This regulation is expected to decrease the take-home salary of employees. On the other hand, it effectively increases PPF and gratuity contributions that will bring financial security to employees during retirement.As a salaried employee, there are three main changes that can affect you after the new wage code is implemented:

Earlier, the basic pay constituted about 30% to 40% of the gross salary and the rest comprised of allowances and retirement benefits. But with the new rule, allowances are limitedto 50%, which means half of the gross pay of an employee would be basic wages.

The Provident Fund is calculated based on your basic pay. If the basic pay is increased, the contribution towards your PPF will also increase, which will effectively reduce your take-home pay.

The increase in basic salary would also mean that your gratuity will increase as gratuity is calculated on your basic salary. It is important to note that an increase in PF and gratuity amount will highly benefit you at the time of retirement.

• Since the new labour law will effectively increase allowances and benefits provided by employers in order to maintain the 50% basic pay limit, the take-home pay will be reduced.
• This effect will mostly impact lower salary brackets, while those in mid and higher salary brackets would not be impacted significantly.
• Lower salaried individuals have a basic pay that is considerably lower than 50% of gross income, and hence companies will have to do a lot of restructuring to meet the 50% requirement. This will result in reduced take-home salary; however, the payout after retirement would be higher.
• For higher salaried individuals, the basic pay is already close to 50% of gross income, so they won’t be affected as much.

• When looking for employment, get all the details that you can regarding your gross salary.
• If a salary break-up is not provided, ask your employer. Take a look at your basic salary structure and additional benefits.
• Check for the contributions made to your Provident Fund and other pension schemes.
• You’ll get an idea of whether your employer is complying with the new wage code or not.

• Take-home salaries will more or less remain similar for mid and higher-income employees. Low-income employees will have to face decreased take-home salaries.
• Allowances given to employees must be at least 50% of gross salary.
• The gratuity and PPF contributions are also bound to alter due to the new wage code.
• All companies will be required to alter their policies to comply with the new wage code.

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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.