New Wage Code: Will Your Salary fall? How it affects EPF, Gratuity

Under the new wage code, effective from 1 Apr 2021, at least 50% of the wage/salary will be basic salary. As we know basic salary impacts EPF and gratuity etc. Currently, most employers have a wage structure in which the basic salary ranges from 25% to 40% of the CTC of the employee. The new wage code will impact the take-home of the employee and also impact the employers, an example of which is shown below. This change is part of Labour law reforms, where the Government of India has rationalized 29 labour regulations and absorbed them into 4 Labour codes. All the Labour laws or codes are expected to come into effect from April 1, 2021, once the Govt notifies the rules. This article explains about the new Labour laws, the definition of wage, 

Let’s take a simple case. Suppose an employee’s current monthly salary is Rs 1 lakh and the basic salary is Rs 30,000. For EPF you and the company contributed PF at 12 per cent or Rs 7,200. This makes his take-home salary before tax as Rs 92,800. 

When the new wage code comes into force, the basic salary will become 50% ie Rs 50,000. So the PF contribution will be Rs 12,000(12%). This makes his take-home salary before tax as Rs 88,000 a month, that is Rs 4,800 less than the earlier salary.

Basics of Salary, CTC, EPF

When a person works for someone else or company one is then said to hold a job and is called Employee. The person or the company one works for is called Employer. Money that is paid is called Salary or Income or Wage. Salary structure varies from company to company but the constituents of Salary are the same. Many employers structure the salary such that basic pay remains low, and allowances are high.  An overview of Salary, CTC from our article Salary, Net Salary, Gross Salary, Cost to Company: What is the difference, is given here

Gross Salary = Basic Salary + Dearness allowance(optional) + Other Allowances(HRA,LTA) + Perquisite(Gift Voucher, Stock options)

                         Net Salary = Gross Salary – Deductions(TDS, Professional Tax)

                         CTC = Net Salary +  Direct Benefits(EPF, Gratuity, Leave Encashment, Corporate NPS)  + Indirect Benefits(Laptop, Coffee, Office Rent)

Cost To Company(CTC) is the total amount of money the company spends on an employee in a year. (Technically CTC does not come in any Labour law)

Basic Salary:  This is the core of salary, and many other components, ex EPF, HRA, are calculated based on this amount. It usually depends on one’s grade within the company’s salary structure. It is a fixed part of one’s compensation structure. It is usually 25-40% of the total wage.

Allowances are fixed periodic amounts, apart from salary, which is paid by an employer for the purpose of meeting some requirements of the employee. E.g., HRA(House Rent Allowance),  transport allowance, uniform allowance, etc

Perquisites are benefits received by a person over and above salary.  For example gift vouchers, stock options, Free meals, Motor car, Rent free accommodation, free electricity etc.

Gratuity is a lump sum payment made by an employer to the employee based on the duration of his total service when the employee leaves the job. The reason for leaving the job can be either by resignation, death, retirement or termination, etc. After working in a company for 4 years,10 months and 11 days an employee is eligible for gratuity. More about Gratutity can be read here.

Gross Salary: is the amount of salary paid after adding all benefits and allowances and before deducting any tax.

Net Salary is what is left of your salary after deductions have been made.

Employee Provident Fund(EPF) is a retirement benefit applicable only to salaried employees of private organizations. Since 2004 Government Employees do not contribute to EPF but to NPS.  It is a fund to which both the employee and employer contribute 12% of the basic salary each month. When one says EPF it means EPF(Employee provident fund), Employee Pension Scheme(EPS), Employees Deposit linked Insurance(EDLI)

For more details about EPF you can read our article Basics of Employee Provident Fund: EPF, EPS, EDLIS which covers how the contributions are calculated based on basic salary and dearness allowance, what are the EPF interest rate, how much would one save in EPF, how would one know about the amount accumulated in PF.

New Wage Code and how it impacts the Employee and Employer

Most salary structures will change as the non-allowance part is usually less and basic pay is usually 25-40%.  The biggest change in the labour laws is the standard definition of ‘wages’ dnd defining that basic should be at least 50% of the total wages. 

 As the Basic salary goes up, 

• EPF contributions of both employee and employers will go up.
• Gratuity amount will be bigger. 

So Companies may see an increase in costs because of their increased contribution to the PF and gratuity. For an employee, the take-home pay may decrease as PF contributions go up.

New Labour Law Reforms

As part of labour law reforms, the Government of India has rationalised 29 labour regulations and came up with 4 labour rules, given below, 

• The Code on Wages, 2019 that includes 4 legislations relating to the wage rate, bonus, time of payment, equal opportunity and remuneration
• The Code on Social Security, 2020 that integrates nine laws including the laws governing Provident Fund, ESIC and Gratuity 
• Code on Industrial Relations that consolidates 3 laws relating to industrial relations and trade unions
• Code on Occupational Safety, Health and Working Conditions that absorbs 13 laws relating to safety and health standards

The Code of Wages, 2019, was passed by both the Houses of Parliament and got the President of India’s nod in August 2019. The other three labour codes were passed by both the Houses of Parliament in September 2020.

All the Labour laws or codes are expected to come into effect from April 1, 2021, once the Govt notifies the rules.

Older definition of wage

In the earlier Labour laws, the definition of wages varied under different laws.

For example, in the Payment of Wages Act and Payment of Bonus Act, Maternity Benefit Act, Minimum Wages Act, HRA(House Rent Allowance) was included in the basic pay.

But HRA was excluded under the Payment of Gratuity Act and the Employees’ Provident Fund and Miscellaneous Provisions Act.  

Thus, employers had to comply with different definitions which were cumbersome. 

Let us consider the salary structure of Shyama with a monthly salary of Rs 30,000 and annual income of Rs 3,60,000 with the split in salary shown below

• Basic Salary  :  12,000
• Bonus             :  4,500
• HRA               : 4,500
• Special Allowance: 9,000
• Total Monthly salary: Rs, 30,000

Wages under Wage and Social Security Code was Rs 21,000 (basic salary(12,000) + special allowance(9,000)). 

Wage under Maternity Benefit Act, the wages was  27,000 (basic salary(12,000)+ allowances(9,000) + Bonus(4,500)) 

Wage under Gratuity Act the wage was Rs 12,000(basic salary(12,000)). 

Thus the employee would receive lower pay during the maternity leave but would gain on retirement.

What is Wage under New Labour Laws?

The biggest change in the labour code is the standard definition of wages’ for the Code on Wages and the Code on Social Security. And defining a minimum percentage as basic. Under the new Labour laws

Basic Salary under the new wage code would be at least 50% of the total wages. 

The Basic Wage would be calculated by removing HRA, LTA, EPF contribution, called as exclusions.

If the exclusions are more than half of total salary, then the excess over the 50 percent, must be included in the wages, 

These days most companies have their basic salary of around 35% to 45%, this would mean rearranging the pay structure.

Let examine the old and new salary structure for an annual salary of 12 lakhs

Basic (40%)	4,80,000
HRA	2,40,000
LTA	2,20,000
EPF (24%)	0,57,600
Bonus	1,00,000
Special allowance	1,02,400
	12,00,000

Assuming total salary employer wants to keep at 12,00,000

Value of exclusions( HRA(240000), LTA(220000), bonus(100000),EPF etc) = 6,17,600 is more than 50% total salary 

As the exclusions cannot exceed 50% of the total salary, i.e. Rs 6 lakh, the amount which is more than 50% i.e. 17, 600 is added back to the salary and basic salary becomes Rs 6 lakh.

Employer’s PF contribution will increase by Rs 14,400.

Now PF contribution of employee would be 12% of 6 lakh, which is 72,000 which is 14,400 more than earlier.

So the employee take-home salary will be less than earlier. This may affect one’s household finances

New Union Budget 2021, New Wage code and EPF

In the Union Budget of 2021, the interest on any contribution above Rs. 2.5 lakh by an employee to a recognized provident fund is taxable effective from 1st April 2021. This means that a person contributing up to Rs 20,833 a month to PF i.e has a basic salary of up to Rs 1.73 lakh a month will not have to pay the tax. But whether the interest will only be taxed in the year of contribution, not after it is still not clear. This only applies to EPF and not PPF.

Let us suppose Amit used to earn Rs 1,00,000 as his basic monthly income and contributed Rs 20,000 as PF.

Now with the wage code being implemented, his PF contribution will rise to let’s say Rs 25,000. Therefore his take-home salary goes down by Rs 5,000.

Now because Amit’s contribution to PF is now higher than Rs 2.5 lakh per year, therefore, according to Budget 2021, his PF will now be taxed this hitting his savings as well.

In what may prove to be a double whammy for the salaried class, Union Budget 2021 clubbed with the newly launched wage code will end up decreasing not only an employee’s take-home salary but also retirement savings.

Related Articles:

• Salary, Net Salary, Gross Salary, Cost to Company: What is the difference
• Basics of Employee Provident Fund: EPF, EPS, EDLIS
• Union Budget of 2021
• What is Gratuity?