New Policy in India: The Reason Why Take Home Salary Likely to Cut Down Under New Rule in April 2021

Take-home salary might come down from the next financial year because companies are set to restructure their employees' salary packages to align them with new wage rules proposed by the government. Photo: India TV News

The new wage rule impacts on take-home salary

According to the new compensation rules as notified by the government under the Code on Wages 2019, the in-hand component of salaries of employees may reduce starting next financial year. Organizations would have to restructure the pay packages as according to the new rules, the allowance component cannot exceed 50 percent of the total salary or compensation and this basically implies that basic salary has to be 50 percent, Nenownews reported.

To be in compliance with this rule, employers will have to increase the basic pay component of salaries, which will result in a proportional rise in gratuity payments and employees' contribution to the provident fund (PF).

Retirement contributions would translate into lower take-home salary for employees but the retirement corpus of employees will grow.

Currently, most private companies prefer to set the non-allowance part of the total compensation less than 50 percent, and the allowance portion higher. However, this will change as soon as the new wage rules come to effect. The rules are expected to impact private-sector employees' salaries because they usually get higher allowances.

Employers will have to hike the basic pay of employees to meet the 50 percent basic pay requirement, according to the new rules.

The new wage rule could also elevate company costs towards salaries as they will have to contribute more towards employees’ PF and gratuity. Experts predicting salary costs incurred by companies to go up by 10-12 percent after the new wage rules are implemented.

National Herald India also calculated that employers will have to hike the basic pay of employees to meet the 50 percent basic pay requirement, according to the new rules.

A look at the new wage rule

• As per the new rules, the allowance component cannot exceed 50 per cent of the total salary or compensation. This implies that the basic salary has to be 50 per cent. In compliance with the rule, employers will have to increase the basic pay component of salaries, resulting in a proportional rise in gratuity payments and employees' contribution to the provident fund (PF).
• An increase in such contributions would mean lower take-home salary for employees. The retirement corpus of employees will also rise.
• At present, most private companies prefer setting the non-allowance part of the total compensation less than 50 per cent and the allowance portion greater. This will, however, change with the new wage rules in motion. It is highly likely that these new rules will affect the salaries of private-sector employees as they usually get higher allowances, reported India TV.
• As per the new rules, employers will need to increase the basic pay of employees to meet the 50 per cent basic pay requirement.
• The Code on Wages Bill, 2019 seeks to amend and consolidate laws relating to wages, bonus and matters connected therewith. It was passed in Rajya Sabha on August 2, 2019. Lok Sabha passed the bill on July 30, 2019.
• The Code will subsume four labour laws -- Minimum Wages Act, Payment of Wages Act, Payment of Bonus Act and Equal Remuneration Act. After its enactment, all these four Acts would be repealed.

Photo: India TV

What do financial experts say?

Financial experts, however, say the new measures will help in improving the social security and retirement-related benefits for the salaried.

"Though the new wage code will give more social security to the employees at the time of retirement by way of an increased corpus of gratuity and provident fund, it will reduce the monthly net take-home salary because as proposed 50 percent of total salary to be considered for the purpose of contributions to retirement funds," Gopal Bohra, a partner in Mumbai-based professional services firm NA Shah Associates, told NDTV.

A higher allocation for retirement planning will translate into a proportional reduction in the employee's take-home salary, also known as "in-hand" salary.

According to NDTV, the Code on Wages — aimed at consolidating and simplifying a number of old labour laws — was approved by Parliament last year. The final rules will be notified by the government after taking public comments into consideration.

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