New Labour Codes Increase PF Liability and Reduce Take-Home Salaries

The four labour codes will soon be implemented; after the new wage codes come into force, there will be changes in how employees’ basic pay and the provident fund will be calculated. The new four labour codes will rationalise 44 central labour laws.

Most of the states have not yet finalised the rules under the four labour codes. A few states are still in the process of finalising the rules to implement these laws. The central government cannot be waiting for a long time for the states to come up with rules under these codes. Hence, it is looking at implementing these codes in a couple of months since time should also be provided to firms or establishments to comply with new laws.

The ministry had already finalised the rules under these new four labour codes. However, these laws could not be implemented as several states were not able to notify rules under these codes according to their jurisdiction.

Since labour is a concurrent subject as per the Indian Constitution, both the Centre and states need to notify rules under these four labour codes to make them as laws of the land in their own jurisdictions.

A few states such as Uttar Pradesh, Madhya Pradesh, Bihar, Odisha, Haryana, Gujarat, Punjab, Uttarakhand, and Karnataka have already finished circulating the draft rules. 

As per the new labour codes, allowances will be capped at 50%. This translates to half of an employee’s gross pay that is basic wages. Calculation of provident fund contribution is done as a percentage of the basic wage, which comprises basic pay and dearness allowance.

Employers have been bifurcating wages into several allowances to keep basic wages minimal and bring down income tax and provident fund outgo. The new wages code renders for provident fund contribution as a stipulated proportion of 50% gross pay.

After the new labour codes implementation, the take-home salary of employees could come down while the provident fund liability concerning employers could increase in many cases. After the implementation, employers will need to restructure their employees’ salaries as per the new wage codes.

For any clarifications/feedback on the topic, please contact the writer at bhavana.pn@cleartax.in

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