Representational image (Credit: Pixabay)
Representational image (Credit: Pixabay)

New office rules: Working hours could be increased to 12 from April 1

The maximum working hours in offices could be increased to 12 hours. The new rule could kick in from April 1. The central government is bringing a slew of new rules which would affect the working population.

It is all part of the changes introduced in the Wages Code Bill which was passed in Parliament last year.

According to the new law, 15-30 minutes of extra work done would qualify as overtime. Currently, less than 30 minutes of extra work is not considered for overtime.

The new rules also state that employees would have to be given a break of half an hour after every five hours of work.

In addition to this, there may be significant changes in the provident fund (PF) and gratuity.

Under the new rules, allowances would be a maximum of 50 per cent of the total salary. This will result in mandatory changes in an employee's salary structure. The basic salary would be 50 per cent or more than the total salary.

Due to the increase in basic salary, the share towards PF will also increase, since it is calculated on the basis of basic salary. It also means that the take-home salary would be reduced.

The new rules are likely to affect the salary structure of high-paid employees especially. Increasing PF and gratuity will also increase the cost of companies as their contribution towards these would increase proportionately.

Salary structure likely to change from April 1

India's new definition of wages could impact the cash-in-hand salaries that employees take home BCCL
India's new definition of wages could impact the cash-in-hand salaries that employees take home BCCL

The take-home component of salaries of employees may reduce starting April 2021 as companies would be required to again design pay packages after the central government notifies draft rules under the new wage rule, reported NDTV.

The new compensation rules, which is part of the Code on Wages 2019, are likely to become effective from April 2021. As per the new rules, the allowance component cannot exceed 50 per cent of the total salary or compensation and this means that basic salary has to be 50 per cent.

In compliance with this, companies 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 will also mean lower take-home salary for employees but the retirement corpus of employees will grow.

India’s new definition of wages

Photo: India
Photo: India

The issue at the heart of the matter is the Indian government’s new definition of wages. It includes all remuneration, whether by way of salaries, allowance or otherwise.

Exclusions — like house rent allowance (HRA), provident fund (PF) contribution and others — still exist but can’t be more than 50% of your basic salary.

This means that even though companies have not been explicitly asked to redefine their compensation structure for employees, they may not have a choice but to take a second look.

According to Vishal Grover, a senior consultant at professional services firm Aon Hewitt, companies in India are currently considering three options:

A large part of the salary gets technically defined as basic pay, and the balance moves to exclusions.

They don’t change anything. They keep the structure as it is. But use the new definition of wages for all social security programmes.

A sort of a middle ground, where the basic is close to 50% and the balance of 50% is made up of exclusions.

Inclusions Specified Exclusions
Basic pay Statutory bonus
Dearness allowance Value of house accommodation and utilities (light, water, medical, etc.)
Retaining allowance Employer contribution towards provident fund
Conveyance allowance
Sum paid to defray special work expenses
House rent allowance (HRA)
Remuneration payable under settlement
Overtime allowance
Retrenchment compensation

Take home salary most likely to take a hit under the new definition of wages

Under the cost to company (CTC) model, companies are likely to increase the share of salary that goes towards your PF. And, it will be at the expense of other allowances leading to lower take-home salary.

Depending on the ratio between basic pay and gross pay, the reduction in cash-in-hand salary to take home would range from 3% to 8% if PF contributions are increased, according to Grover.

This means that even if you get a wage hike in 2021, it's unlikely that there will be any major increase in the amount of money that actually gets deposited into your bank account.

The impact on long term benefits uncertain

The good news is that long term benefits like gratuity and leave encashment are likely to increase under India’s new definition of wages, especially if it's applied retrospectively.

Gratuity Old definition of wages New definition of wages
Basic to gross ratio 25% 50%
Basic salary 25 50
Past service as on date 10 years 10 years
Accrued gratuity 144.23 288.46
Percentage increase in accrued gratuity 100%

This means higher liability for companies, but more money on leaving an organisation for employees. However, the government is yet to clarify how the change in definition will be applied to such long term benefits.

“A lot of things are ambiguous right now until we actually have the draft rules out.” said Solanki.

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