The way salaries are structured in India has gone through a major change under the new labour codes. While an employee's overall Cost to Company (CTC) may not necessarily change, the breakup of that CTC could look different, potentially affecting monthly take-home pay, Provident Fund (PF) contributions and gratuity.
The biggest change is the uniform definition of “wages” across the labour codes. Under the new framework, basic pay, dearness allowance (DA) and retaining allowance are required to form at least 50% of wages.
This change ensures fairness, increases long-term savings and pushes employers to put more of their CTC into long-term social security instead of loose allowances and reimbursement.
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What Has Actually Changed Under The New Labour Law
The main change in the new labour law is the definition of wage. “Wages” now have a common definition across codes, and allowances are effectively capped at 50% of total pay.
- Basic salary will increase by at least 50%
- Bigger PF deductions and matching contributions
- Higher gratuity accrual over time
- The monthly take-home salary may reduce for many employees with mid-range and high-range CTCs
CTC Vs Gross Salary Vs In-Hand Pay
- CTC (Cost to Company): The total annual money your employer spends on you, including your direct pay, employer-side statutory contributions, insurance premiums, variable pay, and gratuity.
- Gross Salary: This is the salary before employee-side deductions. It generally excludes employer-side statutory contributions and other components that are not directly paid as monthly salary.
- In-Hand Salary: This is the final net amount actually credited to the employee's bank account after deductions such as employee PF, professional tax and tax deducted at source (TDS), where applicable.
How PF Can Affect Your Take-Home Pay
PF is one of the biggest areas where employees could notice a difference. Where PF contributions are calculated on the higher applicable wage base, a higher basic salary can result in a larger employee contribution.
Typically, employee and employer PF contributions are 12% each of the applicable PF wage, subject to the rules and limits applicable to the employee.
For example, if an employee's basic wage increases as part of salary restructuring, the employee-side PF deduction can also rise. This reduces monthly take-home pay, but simultaneously increases the amount being accumulated towards retirement.
The impact will, however, not be identical for everyone. Employees whose PF is already being calculated on the statutory wage ceiling may see little or no change in their monthly PF deduction purely because of the revised wage structure.
What Happens To Gratuity?
Gratuity is another component that can benefit from a higher wage base.
Under the labour-code framework, fixed-term or contract employees become eligible for gratuity after just one year of continuous service, down from the old five-year requirement.
Moreover, a higher wage base can also result in a higher gratuity liability for the employer and a potentially larger gratuity benefit for eligible employees.
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Who Is Likely To See A Bigger Impact?
Employees with low basic salaries and a large proportion of allowances in their existing salary structure are more likely to see a significant change in the breakup of their compensation.
Those whose PF is already calculated on the applicable statutory ceiling or whose salary structure already broadly follows the new wage definition may see a smaller impact.
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