Update March 31, 2021: Government defers the implementation of new Wage Code which was set to come into effect from April 2021. So no there won’t be any change in your Salary structure until further notice by the government.
Recommended: Read the “Understand your salary slip” articles so that you are familiar with some of the terms used in this post.
If you are a salaried employee working in India, you might see some changes in salary structure in your payslip starting April 2021, which may lead to a decrease in your take home salary (net salary). In the Wage Code of 2019, it is stated that the allowances part of the salary cannot be more than 50% of the total salary. Let us see in simple language what it means for you and how it impacts your salary…..
Currently, most of the companies keep their salary structure in such a way that the ‘basic’ salary paid is less than 50% of the total salary. This saves some money for the employers (and employees too) like:
- The employer portion of the Employee Provident Fund (EPF) is dependent on the basic salary (12% of the basic salary), and hence less the basic salary, less goes out of the employer’s pocket.
- The gratuity paid to the employees currently is calculated on the basis of the basic salary. Hence, less the basic salary, less will be the gratuity paid by the employer.
- The in-hand salary of employees increases with less basic salary because of less EPF deduction.
- The tax liability of employees may reduce owing to the allowances such as HRA (House rent allowance), LTA (Leave Travel Allowance) and others.
What is the new Wage Code?
As defined in the Chapter 2, Section 2(y) of the Wage Code of 2019, wage is defined as the total remuneration paid to the employee, and includes Basic Salary, Dearness allowance and everything else paid by the employer to the employee. However, this excludes some specific allowances such as the EPF (Employee Provident Fund) contribution, HRA (House Rent Allowance), Conveyance Allowance, Bonus/commissions and others.
In the Wage Code of 2019, it is stated that if the total sum of ‘Excluded allowances’ (mentioned above) exceeds 50% of the total amount paid by the employer to the employee, then the amount by which it exceeds must be considered as a remuneration and should be added to the wages (Basic Salary/DA).
In simple words, the new wage code says that the Basic salary (plus Dearness allowance) must be at least 50% of the total amount paid by the company to the employee.
Examples
Let us understand the impact of the new Wage Code with some examples
| Scenario 1 (Basic salary at least 50% of the total salary) | Scenario 2 (Basic salary less than 50% of the total salary) |
|---|---|
| Basic Salary: Rs 50,000 Provident Fund (employee): Rs 6,000 HRA: Rs 25,000 Bonus: Rs 4,000 Provident Fund (employer): Rs 6,000 Food allowance: Rs 4,000 Other allowances: Rs 5,000 | Basic Salary: Rs 35,000 Provident Fund (employee): Rs 4,200 HRA: Rs 17,500 Bonus: Rs 4,000 Provident Fund (employer): Rs 4,200 Food allowance: Rs 20,000 Other allowances: Rs 15,100 |
| Total amount paid: Rs 1,00,000 | Total amount paid: Rs 1,00,000 |
In Scenario 1, the total value of allowances is Rs 44,000, which is less than 50% of the total amount paid to the employee (Rs 1,00,000 / 2 = Rs 50,000). Hence there will be no impact of the new Wage Code on the employee.
In Scenario 2, the total value of allowances is Rs 60,800 which is more than 50% of the total amount paid to the employee (Rs 1,00,000 / 2 = Rs 50,000). Hence, the amount by which the allowances exceed 50% of the total amount paid to the employee (Rs 10,800) must be added to the Basic Salary/DA of the employee.
Now, the employer in this case would not directly add the amount to the Basic salary, right? They will have to adjust the breakup of allowances such that the total Cost to Company (CTC) remains the same. Hence, they will reduce an amount of Rs 10,800 from one (or more) of the allowances and will add it to the Basic Salary/DA.
What this means for you?
If your current salary is structured like Scenario 1 mentioned above, you will have no impact on your salary.
If your current salary is structured like Scenario 2, then you might see a decrease in the take home salary since with an increase in Basic/DA, your PF contribution will also increase, which means less money will be credited to your account. Other contributions which are dependent on the Basic salary such as National Pension Scheme will also increase with an increase in basic salary.
So this means the wage code is keeping you with less money every month to spend? Well, while the take home salary decreases, there are also some benefits which we get from this:
- Since the Gratuity is dependent on the definition of wage, the gratuity would also increase since your wage might increase.
- Employer contribution towards EPF and Corporate NPS contribution is exempted from tax up to an amount of Rs 7.5L .Since the employer contribution increases, there will be an additional tax exemption on this amount. Hence, the income tax liability decreases.
- This also leads to more retirement savings.
If we see the bigger picture, the new Wage Code may seem not-so beneficial in the short term, but in the long term it definitely brings some extra savings to you.
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Hi! I’m Gaurav, a Software Engineer by profession and a credit card enthusiast by heart. I love earning reward points and cashbacks from credit cards and giving ‘gyaan’ on credit cards and personal finance.