New Labor Code: There’s a lot of buzz going around the country about the New Labor Code. The main question on everyone’s mind is whether your basic salary will jump to half of your CTC, or 50%? The likely answer is no. Actually, companies will tweak your salary so that your take-home pay might go down, but your retirement fund (PF) will get a boost.

Key Takeaways

Quick Read

What’s this new 50% rule all about?

According to the new labor code, your wages need to be at least 50% of your total salary. If your allowances, like HRA, conveyance, overtime, etc., go over 50% of your CTC, the extra amount will be added to your basic pay. Experts suggest that companies won’t just raise the basic pay to 50%, but will adjust the allowance parts to meet the law’s requirements.

Why might your take-home pay drop?

Even if your total salary stays the same, your cash flow could take a hit. The main reason for this is PF and gratuity. These will now be calculated based on a new wage system. As wages go up, the PF amount deducted from your salary will also rise. So, while you might have less cash in hand now, your provident fund (PF) and retirement gratuity will see a significant increase.

Why aren’t companies just bumping up basic pay by 50%?

Companies are steering clear of directly raising basic salaries due to the financial risks involved. If they increase basic salaries, they’d have to contribute more to PF and gratuity, which would hike their overall costs. Since HRA is tied to basic salary, a sudden big jump in basic pay could throw the entire tax structure out of whack. Companies will take a balanced approach to follow the rules while keeping costs in check.

Old vs new tax regime impact

The effect of this salary change will also hinge on your tax regime. Under the old tax regime, you can claim a tax deduction (80C) on your increased PF contributions, which might give you some tax relief. The new tax regime has fewer deductions, but the standard deduction of Rs75,000 may slightly mitigate the impact of the drop in take-home pay.

New checklist for employees

Now, when changing jobs or asking for a raise, don’t just look at your CTC. Consider these points:

PF and Gratuity: See how much the company is investing for your future.

Fixed Pay vs Allowances: How much of your salary is fixed and how much is in allowances.

Net take-home: How much money will come into the bank account every month after deduction of taxes and PF.