New wage rules to kick in from April, expect big changes

NEW DELHI:  Starting April 2021, your social security net is likely to be further strengthened with higher retirement corpus and gratuity payout but your monthly take-home salary may come down. According to the Centre’s proposed compensation rules that are expected to kick in from the next financial year, the allowance component in the salary package cannot be more than 50% of the total compensation. 

In other words, basic salary has to be at least 50% of the total pay. So, the employees’ contribution towards the provident fund (PF) will go up, resulting in lower take-home salary. However, this will entail higher gratuity payments and PF money for workers when they retire.

While employees will benefit long-term, firms may have to shell out more money as the rise in basic pay will result in a proportional increase in employer’s contribution to the PF as well as gratuity. The new guidelines are part of the Wage Code 2019 passed by the Parliament last year. The Central government is expected to notify the final rules after considering feedback from the public. 

Officials said the new definition is an attempt to simplify the various regulations related to wages. According to experts, it will also change the way private firms treat employees. Currently, many private companies prefer to set basic pay as low as 20% of the total salary with allowances taking bulk of the total salary. To comply with the new rules, these companies will have to revamp their salary structure by raising the basic pay.  

According to rules, PF is not compulsory for employees drawing more than Rs 15,000 a month. It is voluntary on part of the employer and employee to make PF contributions on actual wages if the salary is more than Rs 15,000.  Experts point out that some large companies in the formal sector already keep basic pay at 50%. For those firms, the need for revamping salary structure may not arise.

Employee cost to go up for companies
The new compensation norms could force firms to stop the current practice of structuring pay package with higher allowances to lower social security contributions. With basic pay going up, companies will have to shell out more for their share of PF contribution and gratuity