New Labour Code: While the rule to increase the share of basic salary to up to 50% may result in a slight reduction in take-home pay, funds such as PF and Gratuity will grow at a faster pace. The impact of this change will not be uniform across all employees. Find out which employees stand to benefit the most.
Add informalnewz.com as a Preferred Source
New Labour Code: The new labor codes implemented across the country are set to transform the way employees’ salaries are structured. According to the new regulations, an employee’s basic salary—combined with Dearness Allowance (DA) and Retaining Allowance—must now constitute at least 50% of their total salary (CTC). While the rule mandating a 50% share for basic salary may result in a slight reduction in “in-hand” salary, it will simultaneously lead to a faster accumulation of funds such as PF (Provident Fund) and Gratuity. The impact of this change will not be uniform across all employees. Those just starting their careers may stand to benefit significantly, whereas high-income earners are likely to feel an immediate pinch in their finances, as a larger portion of their salary will now be subject to deductions.
Previously, companies would allocate a substantial portion of an employee’s compensation to components such as HRA (House Rent Allowance), bonuses, and special allowances, thereby ensuring a higher “in-hand” salary for the employee. However, under the new regime, if the aggregate of these allowances exceeds 50% of the total salary, the excess amount will be mandatorily added to the basic salary. This will have a direct bearing on PF and Gratuity contributions, as both these benefits are calculated specifically based on the basic salary component.
Who Stands to Benefit?
Balasubramanian, Senior Vice President at TeamLease Services, stated that for employees whose basic salary currently constitutes less than 50% of their total compensation, this change will prove beneficial in the long run. Larger sums will be deposited into their Provident Fund (PF) and Gratuity accounts, potentially yielding a substantial lump sum at the time of retirement. However, the immediate consequence of this change will be a slight reduction in their monthly take-home (in-hand) salary.
Greater Benefits for Young Professionals
Rishi Agarwal, Co-founder and CEO of TeamLease RegTech, noted that employees who are in the early stages of their careers stand to benefit the most from this change. Their salary structures are typically simpler to begin with. The increased PF deductions will serve as a superior savings avenue for them over the long term. They will enjoy the benefits of compounding for a longer duration, thereby strengthening their retirement corpus.
What is the Impact on Mid and Senior Levels?
The salary structure for mid-level employees will become more standardized. Although they may receive a slightly lower “in-hand” salary, their overall savings will increase. Conversely, the impact may be more pronounced for senior and high-salaried employees. Previously, allowances and variable pay constituted a larger portion of their compensation. Now, with the increase in basic salary, their take-home pay (cash in-hand) may decrease; however, a larger contribution will be directed toward Gratuity and PF.
Some Employees Will Have This Option
Employees who fall under the “excluded employee” category of the EPF—specifically, those earning a salary exceeding ₹15,000 who did not previously hold a PF account—will have a choice. They can opt to contribute more funds to their PF account to boost their long-term savings, or they can choose to maintain a lower contribution level to maximize their in-hand salary.
Why Was This Change Implemented?
The government’s objective is to enhance employees’ long-term savings and bolster their financial security post-retirement. This initiative will ensure greater benefits through PF, Gratuity, and other social security schemes.
