New Wage Rules Explained: Higher PF Contributions May Reduce Take-Home Salary
Employees may soon see a shift in their salary structure as the Code on Wages mandates that basic salary must be at least 50% of total CTC or another percentage that the government may announce. Since both PF and gratuity are calculated on basic pay, this change means mandatory savings will rise, but monthly take-home pay could come down.
Why the Change Matters
The rule aims to prevent employers from keeping basic salary artificially low and increasing allowances to reduce their contribution to PF and gratuity. With the new structure, contributions from both employees and employers will increase automatically.
The Code on Wages came into effect on November 21, with detailed rules expected to be notified within 45 days. Once implemented, companies will need to restructure salary packages accordingly.
How PF and Gratuity Will Be Affected
Provident Fund (PF) contributions are calculated at 12% of basic salary, while gratuity is based on final basic pay and total years of service. With basic salary set to rise, both components will increase strengthening retirement benefits.
However, the shift will impact monthly payouts. Experts believe a higher share of CTC directed toward PF and gratuity will reduce employees’ net in-hand salary.
“The new labour codes unify the definition of ‘wages’ under the Code on Wages and Social Security. This would mean better retirement security through higher gratuity and provident fund but a possible dip in take-home pay if employers restructure allowances downward to offset costs,” said Suchita Dutta, executive director of the Indian Staffing Federation.
More Uniformity Across Labour Laws
A key goal of the new wage definition is consistency across labour codes. It ensures that benefits like gratuity, PF and pensions are calculated uniformly.
“Wages now include basic pay, dearness allowance and retaining allowance; 50% of the total remuneration (or such percentage as may be notified) shall be added back to compute wages, ensuring consistency in calculating gratuity, pension and social security benefits,” said Anjali Malhotra, partner at Nangia Group.
What Employees Can Expect
The new definition could also change how gratuity is computed.
Puneet Gupta, partner, People Advisory Services at EY India, said that under the new rules, gratuity could increase as it will be calculated on “wages”, which include basic salary and all allowances except HRA and conveyance allowance.
With the rollout of the reforms, the paycheck may feel lighter, but retirement savings and long-term financial security are expected to improve.
Disclaimer: The information in this article is based on current regulations and expert insights available at the time of writing. It is intended for general awareness and should not be considered financial, legal, or professional advice. Readers are advised to consult qualified professionals or official government notifications for guidance specific to their situation.
Why the Change Matters
The rule aims to prevent employers from keeping basic salary artificially low and increasing allowances to reduce their contribution to PF and gratuity. With the new structure, contributions from both employees and employers will increase automatically. The Code on Wages came into effect on November 21, with detailed rules expected to be notified within 45 days. Once implemented, companies will need to restructure salary packages accordingly.
How PF and Gratuity Will Be Affected
Provident Fund (PF) contributions are calculated at 12% of basic salary, while gratuity is based on final basic pay and total years of service. With basic salary set to rise, both components will increase strengthening retirement benefits. However, the shift will impact monthly payouts. Experts believe a higher share of CTC directed toward PF and gratuity will reduce employees’ net in-hand salary.
“The new labour codes unify the definition of ‘wages’ under the Code on Wages and Social Security. This would mean better retirement security through higher gratuity and provident fund but a possible dip in take-home pay if employers restructure allowances downward to offset costs,” said Suchita Dutta, executive director of the Indian Staffing Federation.
More Uniformity Across Labour Laws
A key goal of the new wage definition is consistency across labour codes. It ensures that benefits like gratuity, PF and pensions are calculated uniformly. “Wages now include basic pay, dearness allowance and retaining allowance; 50% of the total remuneration (or such percentage as may be notified) shall be added back to compute wages, ensuring consistency in calculating gratuity, pension and social security benefits,” said Anjali Malhotra, partner at Nangia Group.
What Employees Can Expect
The new definition could also change how gratuity is computed.
Puneet Gupta, partner, People Advisory Services at EY India, said that under the new rules, gratuity could increase as it will be calculated on “wages”, which include basic salary and all allowances except HRA and conveyance allowance.
With the rollout of the reforms, the paycheck may feel lighter, but retirement savings and long-term financial security are expected to improve.
Disclaimer: The information in this article is based on current regulations and expert insights available at the time of writing. It is intended for general awareness and should not be considered financial, legal, or professional advice. Readers are advised to consult qualified professionals or official government notifications for guidance specific to their situation.
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