April 26, 2023

How India's new wage code affects take-home pay

Summary:

India's latest wage code has revamped salary structures, affecting what you finally take home. Your basic salary now needs to be at least half of your total earnings. This will affect your take-home pay based on your job contract and salary split, including elevated provident fund (PF) contributions, gratuity rule shifts allowing early benefits, and an updated salary structure impacting tax liabilities for high earners while lower and mid-range earners remain relatively unaffected.* *
In the Union Budget 2021, the Indian government consolidated 29 labour laws into four new codes. The codes Include information about:
  • Industrial relations
  • Occupational safety and health
  • Working conditions
  • New wage code
The definition of “wage” has been altered in the new wage code, departing from the stipulations of the Wage Code Bill of 2019. An employee's monthly basic salary, also known as “wage,” needs to be at least 50% of their total cost to the company (CTC).
But what does this actually mean? How will the new wage code of 2022 impact the take-home pay of the salaried class in India?
Let’s dive into the details.

Decoding the new wage code: Examining its impact on take-home pay in India

In most instances, basic salary usually falls between 30% to 40% of gross pay. The rest is covered by allowances. However, the new code says that your basic salary must be at least 50% of the total gross salary. An employee's CTC is made up of at least four main parts: house rent allowance (HRA), basic salary, retirement perks like PF and the national pension system (NPS), and usually a few tax-friendly allowances. According to the new salary code, all those different parts and bonuses given to employees shouldn't be over 50% of the gross salary they receive. If they go over that limit, the extra amount will be considered as part of their wages.
To make things clearer, let’s look at an example. Imagine someone earns ₹ 1 lakh every month. Well, according to the new wage rules, the basic wage would have to be set at ₹ 50,000 at least. And extra benefits like retirement perks and tax-saving allowances will account for the remaining ₹ 50,000. Companies would be required to adjust the allowances to ensure that they remain within the ₹ 50,000 limit.
So how will companies change the salary structure to comply with this new wage code?
  • Elevated PF contribution: Before the new wage code, people used to put in 12% of their basic salary into their PF. But now, with the new salary code shaking things up, that contribution is going to go up by quite a bit, because these things are linked to your basic pay. So, when your basic pay changes, the numbers linked to it will also change. How much exactly? Well, that's still a bit of a mystery. We'll have to wait and see.
    • Gratuity rule shift: Gratuity is like a thank-you gift from your company for being a loyal employee for a certain number of years. It follows this rulebook called the Payment of the Gratuity Act from 1972. According to that rulebook, you had to work for 5 years at the same place to get that gratuity bonus. But things are different now. Thanks to the new wage code of 2022, even if you've been working at a place for just a year, you still get to have that gratuity!
    • Updated salary structure: With the new wage code in 2022, all extra allowances are tied into your basic salary. If it is less than half of your CTC, your basic salary will increase. And as for those additional components such as leave, travel, overtime, and the like? They will now have a limit determined by what remains in your CTC after the basic salary has been allocated. With this salary shuffle, employees who pull in a bigger paycheck might see their tax bill go up a notch. Why? Because those tax limits will only cover up to half of their CTC. But lower and mid-range earners are not likely to get hit with any extra tax load.
The Indian government has redefined what “wage” means and has now linked social security programs like PFs and gratuity to it. But, this does not need to be a bad thing. Financial experts advise that though you might see a bit more of your take-home pay getting skimmed for your PF, your earnings for the future actually could increase. So, even if employees end up taking home a bit less cash, they'll also be putting in more money toward their retirement savings because of this restructuring.
Additionally, under the new wage code, you can have a four-day workweek, but there’s a catch (as always). Currently, the Factories Act 1948 governs working hours and leave centrally, while state-level regulations are managed by the relevant Shops & Establishment Act. No worker under these Acts can be required to work more than 48 hours per week. This has not changed. The weekly total of work hours cannot breach 48 hours. However, under the new wage code, to compensate for the hours you don't work on the fifth day, you'll have to spread them across the other four days. This means you’ll have to clock in a solid 12 hours for each of those days. This whole deal is basically about letting companies do four-day weeks without actually skipping a day's worth of work.

Managing your take-home pay amid changes: Smart strategies with Upstox

Your basic pay is getting a makeover, and that's going to shake things up for other things like the PF contribution and gratuity. Quite understandably, working professionals require guidance to navigate through this new scenario. Gather the knowledge you need to understand your salary and earnings with Upstox. Depending on what your job contract says and how your salary is split, the money you take home could really change. Learn everything you need to know about managing your take-home pay with the new wage code with us. Partner with India’s fastest-growing broker to track and optimise your earnings.

Disclaimer

The investment options and stocks mentioned here are not recommendations. Please go through your own due diligence and conduct thorough research before investing. Investment in the securities market is subject to market risks. Please read the Risk Disclosure documents carefully before investing. Past performance of instruments/securities does not indicate their future performance. Due to the price fluctuation risk and the market risk, there is no guarantee that your personal investment objectives will be achieved.

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