As per the announcement made during the 2021 Union Budget, the New wage code 2021 has been proposed to be in effect starting from April. The New wage code is an attempt by the government of India to simplify the various regulations related to wages.

These new reforms are bound to directly impact the salaries, Provident Find (PF), and gratuity of central government employees apart from affecting the salary structure and tax liability of the private working class.

The definition of ‘wage’ in the Wage Code Bill 2019 has been altered. According to the new definition outlined in the New wage code, Bill 2021, ‘wages’ or an employee’s monthly basic salary cannot be less than 50% of the net CTC (Cost To Company).

As a result, the basic pay might undergo changes, which will also alter the values of other elements like the provident fund contribution and gratuity, as their numbers are dependent on the basic wages. The most immediate effect of this restructuring is that employers will have a lesser take home and will contribute more to the retirement corpus.

Employees belonging to the Private Sector will also be affected, with a marginal reduction in the take-home salary.

Let’s have a detailed perspective of the New wage code Act 2021. What is the New wage code 2021, and what does this mean for the salaried class in India?

The New wage code 2021

During the presentation of the Union Budget 2021, the central government of India has created 4 new codes by combing a total of 29 labour laws. The 4 new codes include the Industrial Relations Code, Code On Occupational Safety, Health and Working Conditions Code, and the New wage code.

There have been several modifications to the existing labour laws. However, the biggest change is on the definition of ‘wage’. The new wage code that addresses this modification aims to directly include 50% of the wages into the salary of employees.

At present, a lot of employers reduce the basic salary of their employees and give them more additional allowances to reduce the burden on the company. However, as per the regulations that have been started by this New wage code Act 2021, the basic salary of the employee cannot be less than 50% of the CTC.

The CTC of an employee includes at least 4 primary components like House Rent Allowance(HRA), basic wage, retirement benefits like PF, National Pension System, and miscellaneous tax-friendly allowances.

According to the new wage code, these elements and allowances provided to the employee should not exceed 50% of the total remuneration paid to the employee. If there is an excess, then the excess amount paid to the employee will be part of the wages.

Currently, the basic salary is in the range of 30-40% of the gross. The allowances make up the balance. But, the new wage code specifies that basic salary should be a minimum of 50% of the gross salary. “This provision will make the allowances of most employees come down”, says Sudhir Kaushik, a chief executive from taxpanner.com.

Let’s see an example to understand this simply. If a person’s salary is 1 Lakh INR per month, then the elements or exclusions mentioned above cannot be more than 50% of the salary. Therefore, the basic wage should be 50,000 INR and companies or firms will have to cut down some allowances so that it does not exceed the 50% limit.

What changes in payroll processing are expected to occur due to the introduction of the New wage code?

Following are the primary changes in payroll processing due to the new wage code Act 2021:

  1. Increased contribution for the PF or Provident Fund

According to Daily Tax Analysis, contribution in PF was 12% of the basic salary. But given the modifications of the New wage code, the contribution to the Provident Fund is bound to increase significantly.

  1. Change in Gratuity Rule

Gratuity is a monetary amount paid by an employer to an employee as a token of appreciation, abiding by the Payment of the Gratuity Act 1972. Gratuity payment is one of the several components that are included in the gross salary of the employee.

As mentioned above, as per the Act, employees are entitled to receive gratuity after 5 years of continuous work in the same entity. Still, as per the New wage code 2021, employees will be entitled to receive gratuity even if they are employed for just one year.

  1. Changes in Salary Structure

With the implementation of the New wage code Bill 2021, CTC will get affected by the increase in the basic salary and if the basic salary of an employee has been less than 50%, it should be increased. Allowances such as leave travel, overtime and conveyance will be capped to the remaining per cent of the CTC.

How does the New wage code 2021 Impact The Take-Home Salary?

Due to the change in the definition of wages, and also the fact that social security elements like PF have now been secured as a percentage of the ‘wages’, there will be a change in the total payouts. Experts say that the PF of the employees will be deducted more. Hence, the take-home salary will be less, but the future of the employees will be secured.

Depending upon the employment letters and the salary breakup of the current employees, the take-home salary will be significantly affected. Even the TDS Calculations based on the revisions in the take-home will be seriously considered by the employers.

Corporates are dwelling on the idea of a reduced take-home salary. Why? Dr. K.R. Shyam Sundar, Economist and Professor at XLRI, says that “ The New wage code 2021 changes the conventional perspective that take-home pay is the most important one.

He further adds, “Employees can now know the fixed component in the pay and can do financial planning. The result will be in the form of a decent sum at the time of retirement.” Therefore, the new reforms can affect the amount of money the employer gets in hand at the end of the month, but it has a positive impact on the future.

Grant Thornton Bharat’s Industry Expectation Survey released in March says that half of the Indian companies are ready to apply the new labour codes.

As experts put it, terminal benefits of the employer will go up due to the higher contribution for social security. To state simply, the new wage codes will provide enhanced social security benefits to employees, thus securing their life after retirement- through their current salaries will reduce marginally.

How the new wage code will affect the taxes paid by employees?

Experts note that due to a salary restructure, the tax liability of employees who are earning a greater salary will likely increase. Why? As the tax capping options will be limited to only 50% of the CTC. However, an additional tax burden is not expected for employees belonging to the low and medium salary bracket.

 How does the New wage code Impact the Business community?

Consider the following important ways how the New wage code Act will affect the business community.

  1. Consistency in tech definition of wages

The current labour laws state at least 12 definitions for ‘wages’. The introduction of the new codes has allowed for a unified definition of the term ‘wages’ and therefore it is expected to reduce the confusion surrounding what should be included under ‘wages’.

  1. ‘Inclusion’ and ‘Exclusions’ are clearly explained and have to be understood by businesses

The code of wages specifically explains inclusions and exclusions under the definition of wages. All companies and firms will have to understand the definition, analyze the components of the employees’ CTC, and revisit the allocation of components in case they do not comply with the definition of wages and specified inclusions and exclusions.

  1. Much wider coverage

Businesses don’t have to look out for what aspects of the law are applicable to their employees. Unlike the current labour laws which are restricted to workers or employees that draw a certain remuneration, the new wage code has much wider coverage.

The new wage code Act 2021 has a new age working model and apply to all employees. The new code gives protection and legal remedies to 21st-century employees and hence the code see,s to be very forward-looking and inclusive.

  1. Faster F&F Settlement

The New wage code states that wages payable to an employee should be paid within two days of removal, dismissal, resignation, or retrenchment. “Businesses should note this and should speed up the or internal processes to ensure that dues are settled in the prescribed time”, says Siddharth Surana, Business Strategy and Transformation Advisor, RSM India.

Conclusion

The State Governments have to bring in their own rules and guidelines to implement the New wage code 2021. The compliance cost might be there, and a lot of paperwork will also need to be done, but the general option is that the new wage code is employee positive.

TopSource Worldwide provides a wide range of employer services that will help you to pay consistently, accurately, and promptly. We also aid employers in ensuring that their payments are compliant with active regulations. If you are an employer and are unsure about how the new wage code is to be implemented, contact us today!