Take-home pay may get slashed under new labour code

Mandate of new rules to make gratuity and provident fund contribution 50 per cent of total pay may goad employers to revise salaries

The I-T Department is keeping track of large cash withdrawals from banks. Representational photo: iStock

Employees on payrolls may be looking at a cut in their take-home salaries when the Centre notifies draft rules under the Code on Wages 2019, reported Mint.

The new rules, however, may provide higher gratuity payments and effect an increase in employers’ contribution to the retirement fund of employees.

While the draft rules mandate that gratuity and provident fund contributions will have to be 50 per cent of the employees’ total pay, to follow it employers have to increase the basic pay component in salaries, so that there is a proportional increase in gratuity payments and employees’ contribution to provident fund.


“The labour code indicates that if the ‘wages’ bucket falls below 50 per cent of the remuneration, then some portion of components excluded from the ‘wages’ bucket will be added to it so that this bucket becomes at least 50 per cent of the remuneration for the purpose of calculating different payments such as social security contributions, gratuity, leave encashment, etc.,” Mint quoted Anshul Prakash, partner (employment labour and benefits) at Khaitan & Co as saying.

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Amit Gopal, principal and India business leader of investments at Mercer said the 50 per cent cap imposed by the law on non-basic pay will impact the gratuity component.

Payroll experts who spoke to Mint said the regulations will goad employers to revise salaries, especially of those whose provident fund (PF) is paid by the company,

If the monthly salary of an employee is more than ₹15,000, it is voluntary on part of the employer and employee to make PF contribution – a minimum of 12 per cent of ₹15,000 – on actual wages. The PF contribution of who come under this bracket will not be impacted by the new rules.

However, experts say, that if the employer and the employee are paying PF from the full basic salary instead of ₹15,000 per month, keeping the PF to the new wage (₹15,000) limit will require a joint declaration with the employee.

Others say that many companies are already following this and have structured CTC (cost to company) breakups where basic salary is 50 per cent and house rent pay is between 40 to 50 per cent.

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