Salary, Wage rules to be changed from April 1, 2021; see the pros and cons

From April 1 2021, take-home salary of private sector employees is set to fall as companies need to restructure pay packages of employees as per the new wage rules.

The new compensation rules, which are part of the Code on Wages passed by Parliament last year, becomes effective from next financial year. As per the new rules, allowances can not be more than 50% of the total compensation. It means basis pay (in government jobs, basic pay plus dearness allowance) will have to be 50% or more of total pay from April, the Economic Times mentioned in a report.

Typically most of the companies keep the non-allowance part of employee's pay package less than 50%. Due to this pay package of most of the employees are likely to undergo change.

Companies will have to increase the basic pay of employees to meet the new requirement. The revision will result in reduction in take-home pay as provident fund (PF) contribution of most of the employees will go up. PF is calculated as a percentage of basic salary.

However, the positive thing is that social security kitty as well as post-retirement gratuity amount of employees will be bigger. Gratuity is also calculated on the basis of basic pay, which will go up.

Meanwhile, companies will have to shell out more towards their contribution to the employees' PF kitty and gratuity payout.

The business daily citing recruitment firms mentioned that for executives in the higher brackets, allowances constitute 70-80% of total compensation.

“The new definition will do away with the current practice of structuring salaries with higher allowances to lower social security contributions,” the business daily quoted an unnamed senior government official as saying.

Xpheno co-founder Kamal Karanth told the daily: “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.”

According to Vishal Grover, practice reader (retirement solutions), Aon India, organisations have started to inquire about the potential changes in the compensation structures and its impact on the wage bill. “Once this is enforced the wage bill and long-term provisions for most employers are likely to go up by 10 to 12% ballpark,” said Biplob Banerjee, chief people officer of Allied Blenders and Distillers (ABD).