WHAT IS THE NEW WAGE CODE?
The new wage code has modified the concept of salaries, resulting in a shift in your compensation structure. Wages will include standard pay, dearness allowance (DA), and other special allowances after implementation, but will exclude things like House Rent Allowance, bonus, overtime allowance, conveyance, and commissions.
According to the new pay code, these excluded products cannot account for more than 50% of overall remuneration. These exclusions would be added to the “wages” portion if they exceed 50% of overall remuneration. The CTC should be 50 percent of your basic salary, DA, plus other special allowances (‘wage’). This is your company’s net monthly cost (CTC).
Quick Take: What is CTC?
The CTC, or Cost to Company, is the gross salary before income tax deductions. A CTC plan includes the base wage as well as housing rent allowance, medical allowance, transportation allowance, and other benefits.
The government has issued new pay regulations, and if your company’s salary system does not comply with the new wage code, it can be changed.
The definition of “pay” will adjust under the Wage Code Bill 2019, also known as the Code of Wages 2019. In simple terms, according to the current meaning, wage must account for at least half of the overall compensation received by the employee. This could lead to a shift in basic pay, which would then lead to changes in other elements such as provident fund contributions and gratuities, which are calculated using the concept of basic salaries.
The reorganization will result in lower take-home pay and higher retirement contributions. Let’s take a look at how the new wage definition is likely to affect the pay structure and tax liability:
NEW DEFINITION OF WAGE
A typical employee’s cost-to-company (CTC) consists of three to four elements. The minimum salary, house rent allowance (HRA), retirement benefits (provident fund, or PF, gratuity accruals, National Pension System), and tax-friendly allowances including leave travel allowance and entertainment allowance.
The wage code specifies the inclusions and exclusions that must be taken into account when measuring wages. All existing elements that make up the wage must be examined in light of the inclusions and exclusions, which means businesses must ensure that the exclusions as specified in the new wage code do not exceed 50% of total remuneration. So, if a person’s monthly salary is Rs. 1 lakh, the exclusions listed cannot exceed 50% of the salary; hence, the basic wage must be Rs. 50,000. To meet the 50% basic wage cap, businesses will have to will such allowances. Allowances will be reduced for most employees as the basic salary may go up from an average of 30% as per our experience to 50% as per law.
This new concept would affect statutory payments like PF and gratuity because they are related to salaries. In situations where the employer contributes to PF on the actual basic salary rather than the minimum required contribution of 12 percent of $15,000, the adjustment in basic pay would result in a change in PF contribution (the minimum wage for PF contributions). A lower in-hand compensation would result from a higher PF contribution.
If a person’s salary is Rs. 1 lakh and the new minimum wage is Rs. 40,000, the employee and employer can each contribute Rs. 4,800 to PF at a rate of 12%. In this case, the in-hand salary will be $90,400. However, if the basic wage is increased to $50,000 after agreeing with the New Wage Code’s concept, the take-home pay will fall to $88,000, a reduction of $2,400. If the basic wage changes, the gratuity will change as well. For each year of service, organizations must pay a gratuity equal to 15 days of the last drawn basic salary. As a result, a raise in the basic wage would result in a rise in the amount of gratuity charged.
IMPACT ON TAXES
The tax implications of pay reform would have to be determined on an individual basis. Those in a higher salary class would pay more tax because the tax planning option is restricted to 50% of cost-to-company (CTC), while those in a lower bracket would be protected by higher retirement contributions and lower tax rates. As PF contributions increase, one might be able to demand a larger deduction. Increased statutory contributions, such as PF, may result in a reduction in tax liability, subject to the overall limit of 1.5 lakh set by Section 80C.
In certain cases, as basic pay rises, the tax deduction available under house rent allowance (HRA) may decrease, as HRA can be claimed as a minimum of three- actual earned, actual rent paid minus 10% of the basic salary, or 50% of the basic salary in metro cities and 40% in non-metro cities.
FLEXIBLE PAY STRUCTURE
Employers would need to be flexible when it comes to determining pay structures. “As per current tax laws, employers may provide flexibility in CTC; hence, the 50 percent allowances should include all exempt options such as HRA, LTC, and perquisites such as car leases, meal coupons, and so on. This will allow employees to make decisions based on their family’s and financial needs.
Employers can cap PF contributions at 12 percent of $15,000, the statutory salary ceiling for PF contributions, to keep increases to a minimum. If your income reaches $15,000, you are not required to contribute to PF. “With the statutory salary limit of $15,000 for PF deduction, many businesses are likely to reconsider their practice of deducting PF on a full basis. This could include obtaining employee consent and notifying PF authorities, but it will help balance employer costs and employee take-home pay.
Employees’ take-home pay will decrease for lower-wage workers but will not adjust significantly for higher-wage workers. Workers cannot be paid less than half of their gross wages in allowances. The Gratuity and monthly Provident Fund are expected to change as a result of the new wage code. Businesses must change their practices to comply with the new wage code, which will take effect in 2021.
The new labour codes will provide social benefits to both organized and unorganized sector employees, such as gig and platform jobs (not on the rolls of an organisation).