The new labor code has come into force. There is going to be a big change in the salary structure due to the new labor codes, the impact of which will be different on different income groups. The biggest change has come in the definition of 'wages', under which it is now necessary that at least 50 percent of the total salary be given as wages.
The earlier practice, in which 'take-home pay' i.e. salary in hand was increased through allowances like House Rent Allowance (HRA), bonus, commission and conveyance, will now be stopped. Under the new rule, if these allowances exceed 50 percent, that excess portion will be added back to the wages. This will ensure that basic pay, dearness allowance (DA) and retaining allowance together form a major part of the salary.
According to Balasubramaniam A, Senior Vice President, TeamLease Services, who will benefit depends entirely on the current PF contribution of an employee and his salary structure, Moneycontrol reports. If the basic pay is less than 50 percent of the CTC, it will be increased under the new rules. This will increase PF and gratuity, but the salary in hand will reduce. This is where many professionals benefit in the long run. On the other hand, employees whose basic pay is already 50 percent or more of CTC may hardly see any change. If the basic pay is already much more than 50 percent, and if the company decides to keep it at 50 percent, then the salary in hand may also increase.
These changes will also affect people working in different industries in different ways. In a Moneycontrol report, Rishi Aggarwal, CEO and co-founder of TeamLease RegTech, said that people just starting their careers are going to benefit the most from this change. Generally, their salary structure is not so planned to save tax and is mostly based on fixed salary.
Even though there may be a slight reduction in the salary in hand due to increase in PF contribution, its real benefit is that in the long run, there will be a significant increase in gratuity and provident fund. Aggarwal says that the principle of compounding proves to be most effective for this group of people. For this reason, this change can be a good way to add money in the long run. This change may change the salary structure, which may reduce the salary in hand in the short run because the allowances will be reduced, but the legal savings will increase significantly. Saikiran Murali, founder of Workline, said mid-level employees will see more streamlined salaries and better long-term savings.
Its biggest impact can be felt at the senior level. High earning people, whose salary has more variable pay and allowances, always focus on saving more take-home salary and tax. Murali said that for high earners, especially those who have a high share of variable pay in their salary, this change may reduce the salary in hand for some time, because a large part of the salary will go into fixed salary. According to the new definition of salary under the Labor Code, performance-based incentives, employee stock option plans (ESOPs), variable part of salary or reimbursement payments to the employee will not be considered part of salary. Therefore, where these exemptions exceed the prescribed limit, this additional amount is automatically added to the salary, thereby increasing the base for calculating PF and gratuity.
