New Labor Code
New Labor Code: A major change has been implemented for employed people across the country. With the new labor code coming into force, the way companies pay salaries is going to change completely. If you are also happy to see the salary message every month, then now you will have to look at your pay slip a little more carefully. Under the new rules, it has now been made mandatory for your basic salary, dearness allowance (DA) and retaining allowance to be at least 50 percent of the total CTC. This change will have a direct impact on the amount you receive every month (in-hand salary) and your retirement fund deduction.
Will the mathematics of your salary worsen or improve?
Till now, companies used to show a large part of CTC in the form of House Rent Allowance (HRA), bonus and other special allowances to give higher take-home salary to the employees. This brought more cash in hand, but due to low basic salary, savings for old age were reduced. The new rule has put a stop to this old system. Now if all your allowances exceed 50 percent of the total salary, then that additional portion will compulsorily be added to the basic salary.
Since the calculation of Provident Fund (PF) and gratuity is done directly on the basis of basic salary, increasing the basic means that now more money will be deposited in your PF and gratuity fund than before. Balasubramaniam, Senior Vice President, TeamLease Service, also believes that this change will prove to be very beneficial in the long run for those employees whose basic salary is currently less than 50 percent of the CTC.
Great opportunity for freshers, cash-in-hand will reduce for seniors
This new labor code is not going to affect every employee equally. According to Rishi Agarwal, co-founder and CEO of TeamLease RegTech, this change is a great opportunity for professionals who are just starting their careers. Their salary structure will be more transparent and organized from the beginning. By deducting more money in PF from the beginning, they will get tremendous benefit of compounding (compound interest) in the long run, which will make their retirement corpus much stronger.
On the other hand, mid-level and senior level employees may face an immediate shock. Variable pay and allowances have a higher share in the CTC of employees in higher salary brackets. Now, due to increase in the range of basic salary, there may be a slight reduction in their monthly in-hand salary, although in the long term, their savings will only increase.
Will you have any options?
In this new structure, some special employees have been given some freedom to choose their investments. Employees who fall in the ‘Excluded Employee’ category of EPF, i.e. those whose basic salary is more than Rs 15,000 and did not already have a PF account, will get an option. If such employees wish, they can increase their contribution in PF or can retain their in-hand salary by choosing minimum contribution.
Why did the government take this step?
The vision behind this entire rule of the government is very clear. The government aims to promote long-term savings of the employees. Even if the money in hand may reduce a bit during the job, but after retirement, when a person needs financial support the most, then this huge fund of PF and gratuity will act as a strong shield.
