Recently, companies implemented pay-cuts during the coronavirus lockdown period, reducing the in-hand salary of employees. The pay-cuts were put in place as all business activities had come to a grinding halt due to the COVID-19 lockdown.
Now, the take-home salaries of employees are going to come down from April 2021 in view of the new wage rules, which require companies to restructure pay packages of their staff. However, savings towards provident fund and gratuity earnings will increase.
The new compensation rule states that allowances cannot be more than 50 per cent of the total salary, meaning the basic pay has to be 50 per cent or more of total pay from April 2021.
What usually happens is, employers keep the non-allowance part of the salary below 50 per cent, resulting in high in-hand pay for employees. However, from the next financial year, employers are required to increase the basic pay of employees. This will result in reduced take-home salaries because of rise in gratuity payments and employees’ contribution to the provident fund.
The Provident Fund contribution is calculated as a percentage of basic salary. The draft rules of the Code of Wages 2019 state that "wages for the purpose of calculation of gratuity and provident fund contributions will have to be at least 50 percent of employees' total pay or compensation.”
In order to balance out the increased contribution towards PF and gratuity, companies are expected to introduce a proportional cut in the allowance component.
The Code on Wages Bill, 2019, passed in Lok Sabha last year on July 30 and Rajya Sabha on August 2, seeks to amend and consolidate laws relating to wages, bonus and matters connected therewith.
The new wage rules subsume four labour laws – Minimum Wages Act, Payment of Wages Act, Payment of Bonus Act and Equal Remuneration Act. Once implemented, the Code of Wages 2019 will help employees save more money for post-retirement.