New Labour Code: Will Your Take-Home Salary Reduce? Here's All You Need To Know

The implementation of the four labour codes has revived questions about how salaries will be structured and whether employees’ take-home pay will fall when the new definition of wages takes effect.

The key concern comes from the rule that at least 50% of an employee’s total remuneration will be counted as wages for the purpose of calculating statutory deductions.

Until now, companies typically kept the basic salary at a lower proportion of total cost-to-company (CTC) and used allowances to form the rest of the pay structure. Employee Provident Fund (EPF) contributions are based on basic pay, with 12% contributed by the employee and 12% by the employer. A lower basic component meant a smaller deduction for PF and therefore a higher take-home. Gratuity calculations also used basic pay as the base.

The new labour codes introduce a standardised definition of wages. It includes basic pay, dearness allowance and retaining allowance. At least 50% of the total remuneration will be treated as wages for statutory calculation. This increases the base for PF and gratuity.

The revised definition of wages will influence how retirement and other statutory benefits are computed, India Today report quoted Alay Razvi, Managing Partner at Accord Juris, as saying.

Razvi clarified to India Today that that the change does not require employers to increase the basic salary paid to workers. The shift lies mainly in the wage figure used for computing PF and gratuity. Razvi added that the figure used to compute statutory contributions will rise for most employees, including those on fixed-term contracts, India Today reported.

“So yes, in effect the deduction base goes up, but actual pay-structure changes depend on employer implementation.” India Today quoted Razvi as saying. The report added that he said take-home salary could reduce if the increased deductions are passed to employees without an increase in gross salary.

The unified definition could bring better retirement security through larger PF and gratuity but may result in a lower net salary if employers shift allowances downward to manage increased contribution costs, according to a report by Economic Times.  

The changes could reduce take-home pay if firms adjust salary structures to contain expenditure, The Economic Times quoted Suchita Dutta, Executive Director of the Indian Staffing Federation, as saying

The codes could lead to higher gratuity payouts because the calculation will use wages that include basic and all allowances, excluding house rent allowance and conveyance allowance, EY India Partner Puneet Gupta told ET.

The standardised wage definition keeps basic pay, dearness allowance and retaining allowance at the centre of benefit calculations, The Times of India reported citing Anjali Malhotra, partner at Nangia Group.

“Wages now include basic pay, dearness allowance and retaining allowance; 50% of the total remuneration (or such percentage as may be notified) shall be added back to compute wages, ensuring consistency in calculating gratuity, pension and social security benefits,” Malhotra told ToI.

The change will depend on employer restructuring. If the CTC remains unchanged and the wage portion rises to meet the 50% threshold, PF deductions will increase and take-home pay could fall. If employers increase CTC to offset the effect, net pay may not change.

For now, employees await clarity on final rules and practical implementation at company level.