India’s new labour codes may change salary structures by making basic pay at least 50% of CTC. This could increase PF and gratuity but reduce monthly take-home salary for employees.
New Delhi: India is all set to roll out its new labour codes, and they are going to shake up your salary structure. The new rules say that an employee’s ‘wages’ (or basic pay) must be at least 50% of their total salary (CTC). Now, companies are not likely to just give everyone a 50% basic pay hike. Instead, they will probably restructure other parts of your salary. This means your CTC might stay the same, but the money you get in your bank account every month will definitely reduce.
So, what’s this new definition of ‘wages’?
Under the new labour code, if your allowances like HRA, transport, and overtime pay add up to more than 50% of your CTC, the extra amount will be counted as part of your ‘basic pay’. This change directly impacts how your Provident Fund (PF) and Gratuity are calculated, causing them to go up.
CA Chandni Anandan, a tax expert at ClearTax, explains, “This rule doesn’t force companies to raise basic pay to 50%. It just changes the definition of ‘wages’. If the basic pay and dearness allowance are low, companies can reclassify other allowances to meet the new requirement.”
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Why will my take-home salary decrease?
Let’s take an example. Suppose an employee has an annual CTC of Rs 15 lakh. Right now, their basic pay might be around Rs 4.5 lakh. Under the new rules, their PF and gratuity contributions will increase. As a result, their annual take-home salary could drop by about Rs 52,000.
“Companies will likely restructure salary components behind the scenes instead of directly increasing basic pay. While this means more savings for your retirement, the cash you get in hand each month will be less,” says Sudhir Kaushik, CEO of Taxspanner.
Why are companies hesitant to increase basic pay?
There are a few big reasons why companies don’t want to simply raise basic pay to 50%. When basic pay goes up, the company’s contribution to your PF, gratuity, and NPS also increases, which adds to their costs. For the employee, it means a big drop in their monthly salary. Also, allowances like HRA are linked to basic pay. If the basic is too low, you can’t claim HRA benefits properly. So, companies will try to find a middle path.
Impact on your tax regime
Old Tax Regime: If you are in this regime, you can claim tax exemption on your PF contribution. However, this might not be enough to cover the entire extra deduction from your salary.
New Tax Regime: This regime has fewer exemptions, but the higher standard deduction of Rs 75,000 might soften the blow of the reduced take-home pay to some extent.
What should you look out for?
When you accept a job offer, don’t just look at the CTC. You should pay close attention to a few things:
- How much are your PF and gratuity contributions increasing?
- What is the ratio between your allowances and fixed pay?
- What is your final net take-home salary after all deductions?
“In the long run, this is a good move for social security. You will be saving more money for your retirement. It’s better to see the drop in take-home pay as an ‘investment’ rather than a ‘cut’,” advises Chandni Anandan.
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