The Ministry of Finance recently announced that the Central Government of India would be implementing a new Wage Code Bill from 1 April 2021. This new Wage Code Bill will have an impact on an employee’s cost to the company (CTC) as well as an employee’s wage bill.

Notably, the Code of Wages was passed by the Centre at the end of 2019.

Although the Code of Wages was introduced in 2019, the centre was cautious about immediately implementing it, as it wanted to implement it with three other codes, i.e., Code on Industrial Relations, Code on Social Security, and Code on Occupational Health Safety & Working Conditions.

These four broad labour codes, i.e., wages, industrial relations, social security and occupational safety, health and working conditions (OSH) have already been notified after the president’s approval.

The Code on Wages was passed by Parliament in 2019 while the three other codes got clearance from both the Houses in 2020.

The Code of Wages in 2019 includes three components:

• Basic pay, which is linked to inflation
• Dearness allowance
• Retention payment

While the Code of Wages envisages all remuneration is paid to employees, it does exclude the following:

• Bonuses
• Pension and PF contribution
• Conveyance allowance
• HRA or housing benefits
• Overtime
• Gratuity
• Commission
• Retrenchment compensation

The wage bill aims to push employees to modify their compensations so that they accommodate the new definition of wage that has been pushed by the centre. The new wage bill includes post-retirement benefits. However, as mentioned earlier, it will see a decline in take-home pay

How does it work?

Basic pay: The new wage code makes it mandatory that basic pay accounts for 50% of an employee’s net CTC. In case your basic salary is less than 50% of your CTC, then things are going to change for you from the start of April. In case you’re a government employee, then you will see a massive increase in your basic pay. Earlier, government employees would have a basic pay of Rs 7,000, which will now go up to Rs 18,000.

Other factors: Allowance to employees i.e. house rent allowance (HRA) leave travel allowance (LTA), overtime allowance, and conveyance allowance will limit to the remaining 50% of your net CTC. If these factors are in excess of 50%, then they will deem as remuneration and will be an addition to wages.

Provident fund and gratuity: in the current scenario, an employee’s contribution to the provident fund (EPF) is 12%. However, an increase in basic salary will automatically mean an increase in PF. As the new rules mandate a 50% basic salary, it also means an increase in contribution to PF. So if you make Rs 30,000 per month, Rs 15,000 will be basic salary, and Rs 1,800 will be the contribution to your PF account.

The interesting rule in the new labour laws is interesting. Till 31 March 2021, those who work at an organisation will entitle a gratuity only after they spend five years there. However, the new rules have states that the employees entitle to gratuity after spending a year at an organisation. The gratuity will also be calculated taking a larger base. Earlier, it was just basic pay. Now, it will be basic pay, travel, special allowance, etc, thereby adding to the gratuity cost of companies.

LTA and DA: last year, the central government had relaxed the leave travel allowance scheme. This is due to the outbreak of the novel coronavirus, COVID-19. This relaxation allowed government employees to claim income tax benefits on expenses made between October 2020 and 31 March 2021 on items that attract 12% GST or more instead of travel expenses.

When it comes to DA, it is a rumour that the central government will announce a 4% hike. If the rumours are true, then the DA of a central government employee will go up to 25%

Will this mean more to take home?

Unfortunately, no. The money credited into your account will see a reduction. But most of that money will be locked up for retirement or in case of an emergency. The new labour codes aim to provide social security to the organised sector, as well as the informal sectors.

If you’re an employee with a high-salary range, then there will be an impact on gratuity as well as superannuation payouts.

If you’re an employee in the mid-salary range, the impact will be in bonus, gratuity, and superannuation payouts. Employees will also get out of the purview of the statutory bonus.

Also read: Recent Labour Law reforms in India

Will India's new Labour Codes boost SME businesses?

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