Will My Paycheck Fall With The New Wage Code? All You Need To Know

Depending on your PF contribution and pay scale, you may be looking at a slight cut in take home pay next financial year

Your take-home salary could fall from April 1, 2021, if the government notifies the new compensation rules under the Wage Code, 2019.

Passed by Parliament and approved by the President, the new rules will require basic pay to be at least 50% of the pay package and will push employers to restructure their packages according to these rules. The compensation rules are a result of merging 29 of the 44 central government laws on labour and wages, and include beneficiary legislation such as those on provident funds (retirement fund) and gratuity.

By way of this change, while contributions to one's provident fund and gratuity payments will increase, it may come at the expense of short-term take home pay depending on whether you make a contribution to the PF, your total pay and how much of it is your basic pay. These components of your payslip form the basis on which your PF contribution and gratuity payment is decided, and is called non-allowance pay.

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Here's all you need to know

1. What are the changes?

The new code requires basic pay, that is non-allowance pay, to be 50% or more of an employee's total pay, under a new unified definition of "wages" by the new code.

This will especially impact employers who keep the non-allowance portion of the total pay less than 50%.

This will take effect from the next financial year, subject to approval by the government. In October this year, Union Labour and Employment Secretary Apurva Chandra said that the new labour and wage code would go into effect from April 1 next year. There would also be 45 days open to public comments.

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2. How will this affect me?

Your take home pay could fall.

Your contributions to your provident fund amount to 12% of your non-allowance pay. Therefore, should these new rules get notified and should your non-allowance pay increase as a percentage of your total pay, that would get hit what you take home as your paycheck every month.

However, this would also mean that you would be having an improved contribution from your end towards your provident fund, and subject to withdrawal rules or retirement, you would be having a larger corpus at your disposal.

However, those earning less than ₹15,000 would be subject to a more perceived impact. According to a report, the provident contribution should be at least 12% (or whatever the prevailing contribution rate is) of at least ₹15,000 for those earning above ₹15,000 mark for both the employer and employee. Therefore, if this threshold holds under the new code, those earning more than ₹15,000 on which the provident fund contribution is calculated would see minimal impact. But those earning less than ₹15,000, who may witness non-allowance income to increase to 50% or more of total pay could see their take home pay reduce.

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3. How will this affect my employer?

Your contribution of 12% of your non-allowance pay is matched by your employer every month. It is to reduce this cost that employers choose to keep the non-allowance part of the total pay less than 50%.

Just like an increase in non-allowance pay as a percentage of total pay would result in an increased contribution from your end, your employer would have to match the increased contribution. Therefore, the compensation cost borne by your employer on its employees could increase too.

Your gratuity, paid by your employer, is also subject to improve, which again is a function of basic pay and dearness allowance. It is paid at the time of retirement, or after five years of service, or before five years on the death or disability of an employee.

Thus, if your employer is already keeping the non-allowance component of your total pay high, you should not expect a lot of change in your paycheck.

Also Read: RBI's Inflation Targets May Be Loosened To Bolster Growth: Bloomberg

Updated On: 2020-12-14T19:27:30+05:30
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