From April 1, new labour rules in India will change how employees' salaries are structured in the new fiscal. Under the updated wage code, the government has introduced a series of reforms on wages, gratuity, overtime and other aspects of work. These updated rules are expected to bring relief for employees in the Indian workforce, offering them strong financial and legal security.
One of the key focus areas within the new labour laws will be the structure of monthly salaries for employees. Under the updated wage code, a larger portion of the salary will be counted as “basic pay.” This has implications for the Employees' Provident Fund and gratuity, which are set to see increased contribution from this fiscal. This also means that your take-home (in-hand) salary may decrease slightly.
However, employees must note that PF is an essential long-term savings tool. It comes with guaranteed returns and allows employees to build a corpus for their retirement years. As a result, despite an adjustment in the take-home pay, this may prove to be a beneficial step in the long-run.
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How Will Salary Structure Change?
The new wage rules introduce a “uniform” definition of wages. In this, an employee's basic pay, dearness allowance and retaining allowance must form at least 50% of their total salary. If excluded components like house rent allowance or bonuses exceed 50%, the excess is added back to the wages.
The new rules can raise contributions in the PF account of employees as most of these benefits depend on wages. Additionally, benefits like gratuity and insurance cover may also increase.
EPF Contributions
Under the Employees' Provident Fund (EPF), both employee and employer contribute 12% of the basic salary plus dearness allowance (DA). The employee's 12% is deducted from their salary, while the employer's 12% is split between the EPF account (3.67%) and the Employees' Pension Scheme (EPS) (8.33%).
If this system is already being followed by your organisation, then you may not see significant changes to the take-home salary. For other employees, a revised structure could mean high contributions into PF accounts.
How Will Gratuity Change?
Under the new labour codes, fixed-term and contract workers become eligible for gratuity after just one year of service instead of five. Permanent employees need to serve continuously at a workplace for at least five to be eligible for this benefit.
Since gratuity depends on last drawn wages and service period, this component will also likely see an increment in an employee's salary structure. This is mainly because the structure of wages has been revised.
This change is set to mainly impact employees who earlier had lower basic pay as part of their overall salary. Experts note that raising someone's basic pay from 30% to 50% wage floor, could now result in a 66% increase in the gratuity payout.
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