New Labor Code: Salary is the biggest assurance for everyone—it’s all about how much cash they take home and how much they save. But the new Labor Code is set to change this calculation quite a bit. The government has rolled out the Wage Code, which means companies now have to ensure that their employees’ basic pay is at least 50% of their total CTC. This change will directly affect PF, gratuity, and your take-home pay.
New rules for basic salary
The new wage code requires that an employee’s basic salary be at least half, or 50%, of their CTC. In the past, many companies kept basic pay low and bumped up allowances to cut down on PF and gratuity expenses. This new system puts a stop to that practice.
In-hand salary will be reduced
PF is calculated based on the basic salary (12%), and gratuity is also derived from this. So, an increase in basic salary means both PF and gratuity will go up. This will strengthen retirement savings, but your take-home pay will take a hit. Suchita Dutta, executive director of the Indian Staffing Federation, mentions that having a consistent definition of “wages” across all labor codes will standardize the calculation of social security benefits. This will lead to higher gratuity and PF benefits for employees, but allowances might be trimmed to keep corporate expenses in check.
Anjali Malhotra, a partner at Nangia Group, pointed out that wages will now encompass basic pay, DA, and retaining allowance, with 50% of the total remuneration added to this. This will form the basis for PF, gratuity, and pension. Puneet Gupta from EY India stated, “The new definition could lead to gratuity being much higher than before, as several allowances will now be counted as wages, excluding HRA and conveyance.”
Gratuity will be available only after one year of service
The new labor code significantly changes the rules regarding gratuity. The most significant change is for fixed-term employees (FTE). Previously, an employee had to work for at least five years to receive gratuity, but now this period has been reduced to just one year for FTE employees. Upon completion of one year, they will be entitled to gratuity, just as permanent employees are.
According to the government, FTE staff will now be provided with all the same benefits as permanent workers, including leave, medical benefits, and social security. Furthermore, they will receive equal pay, increasing both their income and security. The government claims that the new labor code simplifies the process and provides greater protection to employees by consolidating 29 previously separate regulations.