The wage math: PF contributions may go up, dent take-home pay under new labour code
New Delhi: Provident fund and gratuity contributions are expected to increase with the Code on Wages mandating that the basic salary of employees must be at least 50% of their total cost-to-company (CTC) or the percentage notified by the government.
Since PF and gratuity are calculated on the basis of basic salary, a higher basic pay will result in increased contributions from both the employee and the employer. While this will enhance the mandatory retirement savings for employees, increased outgo towards PF and gratuity from the same CTC will weigh on take-home salaries.
The Code on Wages came into effect on Friday, though the government will notify the rules only in the next 45 days. Establishments will have to align their salary structure as detailed in the rules.
This provision on basic salary has been introduced to prevent companies from deliberately keeping the basic pay low while enhancing allowances to minimise their contribution to retirement funds and gratuity.
The PF contribution is calculated at 12% of the basic salary. Gratuity payment depends on the final basic salary and the number of years worked at a company.
The new provisions will likely result in a lower take-home salary for employees as provident fund and gratuity contributions would rise within the given CTC, said experts.
"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.
The uniformity in definition across labour codes would mean consistency in calculation of social security benefits.
"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 professional services firm Nangia Group.
Puneet Gupta, partner, People Advisory Services at EY India, said the roll-out of the labour codes could lead to higher gratuity as it will be calculated on "wages", which would include basic salary and all allowances except HRA and conveyance allowance.
Since PF and gratuity are calculated on the basis of basic salary, a higher basic pay will result in increased contributions from both the employee and the employer. While this will enhance the mandatory retirement savings for employees, increased outgo towards PF and gratuity from the same CTC will weigh on take-home salaries.
The Code on Wages came into effect on Friday, though the government will notify the rules only in the next 45 days. Establishments will have to align their salary structure as detailed in the rules.
This provision on basic salary has been introduced to prevent companies from deliberately keeping the basic pay low while enhancing allowances to minimise their contribution to retirement funds and gratuity.
The PF contribution is calculated at 12% of the basic salary. Gratuity payment depends on the final basic salary and the number of years worked at a company.
The new provisions will likely result in a lower take-home salary for employees as provident fund and gratuity contributions would rise within the given CTC, said experts.
"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.
The uniformity in definition across labour codes would mean consistency in calculation of social security benefits.
"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 professional services firm Nangia Group.
Puneet Gupta, partner, People Advisory Services at EY India, said the roll-out of the labour codes could lead to higher gratuity as it will be calculated on "wages", which would include basic salary and all allowances except HRA and conveyance allowance.
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