The government has proposed new wage rules that would lead to companies restructuring the employees’ salary packages. The draft rules that are a part of the Code of Wages 2019 state that the salary component comprising the allowances of an employee’s gross pay or the Total Cost to Company (CTC) cannot exceed 50% of the total compensation. In turn, the basic salary of the employee must be 50% of the total pay.
In the present scenario, most of the private companies prefer providing a much lower share towards basic pay and keeping the major part of the total compensation towards other allowances. If the new wage rules are implemented starting next April, 50% of the total compensation is to be paid as basic pay, flipping down the total arrangement of the salary components.
On the surface level, it may seem that the re-allocation of the pay towards different allowances and basic pay would not affect the employees in any way since they will still be earning the same amount as before. However, there is a catch here.
We know that 10%-12% of an employee’s basic pay will be contributed towards EPF contributions. Some companies even deduct the employer’s share of EPF contributions from the employee’s CTC, aggregating to 20%-24% of the basic salary. Once the basic pay increases to 50% of the CTC, about 24% of the 50% of your CTC will be deducted towards EPF contributions.
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In addition to this, the contribution towards gratuity will also increase with the implementation of the new rules since this component is also dependent on the basic pay.
The resulting take-home salary will supposedly take a hit. But, from a futuristic perspective, the new rules are expected to improve social security and put more money at hand after retirement. Though the government’s proposal is not something one can completely deny, it may make the lives of the middle-class salaried people tough by taking off their salary from hand.
The move can be seen as a burden for the salaried middle class since their monthly budget plans will have to be remade. For people who happen to spend all their salary towards different buckets right on the payday, a sudden shortage in the pay would be devastating. The class of people who live paycheck to paycheck would not appreciate having a bigger retirement corpus and not having enough money at hand to survive the current month.
Though the Code of Wages 2019 has not yet been implemented and that the world has not yet ended, there is no need to panic. The final rules will only be announced after considering public opinions. Let us wait and watch!
For any clarifications/feedback on the topic, please contact the writer at apoorva.n@cleartax.in
