In the new financial year, your take-home salary may reduce since companies are gearing to restructure pay packages in line with the government’s plan to churn a new wage rule.
What Is This New Wages Rule?
According to these new rules, the take-home pay for the private sector employees is set to fall as companies need to restructure their pay packages as per the new wage rules.
Being part of the Code on Wages passed by Parliament last year, the new compensation rules are set to be effective from April 2021.
The allowances can not be more than 50% of the total compensation, according to this rule.
In simple words, the basic pay (in government jobs, basic pay plus dearness allowance) will have to be 50% or more of total pay according to the TOI report.
So far, most of the companies keep the non-allowance part of an employee’s pay package less than 50%.
Now they will have to undergo changes in the pay packages of most of the employees.
How Will This Affect The Employees?
For doing so, the companies will have to increase the basic pay of employees to meet the new guidelines.
Ultimately, the revision of the package will result in a reduction in take-home pay but the provident fund (PF) contribution will go up in most of the cases.
Since it’s been calculated on the percentage of basic salary.
The best part is that after undergoing this change, the social security kitty, as well as post-retirement gratuity amount of employees, will get larger.
It will also affect Gratuity as it is also calculated on the basis of basic pay and is expected to go up.
How Will This Affect The Employers?
This will affect the employers too since they will have to shell out more towards their contribution to the employees’ PF kitty and gratuity payout.
For the top-level executives, the allowances constitute 70-80% of total compensation according to the business daily, citing recruitment firms.
One of the senior government officials said, “The new definition will do away with the current practice of structuring salaries with higher allowances to lower social security contributions,”.
“Gratuity payout hike will increase the cost impact for employers when it comes to CXOs. And CXOs will see an increase in their net income from gratuity by almost 1-1.5 times, thanks to this new wage code,” said Kamal Karanth, the Xpheno co-founder.
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