The new wage code stipulates that minimum wages must account for half of an employee’s CTC. Employee benefits such as leave travel, house rent, overtime, and transportation would have to be reduced to the remaining 50% of CTC. According to the new regulations, the allowance portion of the total salary or compensation cannot exceed 50% of the total salary or compensation, which means that the basic salary must be 50%.
If a person’s salary is Rs. 1 lakh and the new minimum wage is Rs. 40,000, the employee and employer can each contribute Rs. 4,800 to PF at a rate of 12%. In this case, the in-hand salary will be $90,400.
However, if the basic wage is raised to Rs 50,000 after agreeing with the Current Wage Code’s concept, the take-home pay will fall to Rs 88,000, a decrease of Rs 2,400.
In situations where the employer contributes to PF on the actual basic salary rather than the minimum required contribution of 12% of Rs 15,000, the adjustment in basic pay would result in a change in PF contribution.
Previously, the Provident Fund was measured based on an employee’s basic salary, taking into account the dearness allowance and other benefits provided by the company. The employer and employee contributions will now be based on half of the CTC. Your PF contribution will go up, but your take-home pay will go down.
Gratuity would also adjust as a result of the updated wage code. Gratuity would have to be measured on a broader scale, taking into account all standard wages and other salary deductions such as travel, special allowance, and so on. This will increase the cost of gratuities for businesses. Gratuity is the amount of money accrued to you at the completion of a final and permanent work term. Even after a year of service, the employee is entitled to a gratuity.
Impact on Taxes
Those in a higher salary bracket would pay more tax because the tax planning option is limited to 50% of cost-to-company (CTC), while those in a lower bracket would be protected by higher retirement contributions and lower taxes.
As PF contributions increase, one might be able to demand a larger deduction. Increased statutory contributions, such as PF, which result in a reduction in tax liability, subject to the overall limit of Rs 1.5 lakh set by Section 80C.
In these turbulent times, the new pay code seeks to provide workers with stability and assurance. The government needed to ensure that millions of workers’ retirement plans were safe. As a result, the new pay code was announced.
When the company restructures after compensation provisions, it will be wise to consult a professional to understand the pay structure and plan your investments accordingly.