April 2021 saw the beginning of a new financial year, and the salary structure for most individuals changed because of the new wage code. The main mandate that the new wage code laid down was that an individual’s basic pay should at least be 50% of the total cost to the company (CTC).

The question now arises as to how this mandate would affect an individual’s take-home pay. We will explore that in depth in this article. But first, let us cover some basics.

• Under the New Wage Code, a lower-income individual’s take-home salary may decrease, while higher-income individuals may not see a distinct difference.
• Companies cannot offer allowances to employees that are less than 50% of the gross salary.
• Both aspects of gratuity and the monthly PF are expected to change after the implementation of the New Wage Code.

The term ‘wages’ has been redefined in the wage code, which has further affected the salaries of individuals. The new definition of “wages” includes everything from basic pay and dearness allowance (DA) to other special allowances and emphasises that these should be 50% of an individual’s CTC.  ‘Wages’, however, excludes House Rent Allowance (HRA), overtime allowance, bonuses, commissions, and conveyance.

According to the new wage code, there have been three significant changes:

Basic pay

➔ The compensation structure for basic pay earlier sat between 30% and 40% of the gross salary.

➔ Any allowances that formed the balance were modified.

➔ Under the new wage code, basic pay needs to be capped at about 50% of an individual’s CTC.

➔ This ensures that the allowances form 50% of the gross pay.

Provident Fund

➔ Initially, PF was calculated by combining an individual’s basic pay, dearness allowance, and other allowances.  

➔ In the new wage code, the contributions of both the employer and employee will be calculated on 50% of the CTC.

➔ This will increase PF contribution but decrease take-home pay.

Gratuity

➔ Before the new wage code, gratuity was calculated as a percentage of an individual’s basic salary.

Post the new wage code, gratuity will also be calculated on “wages”.

Here are a few points that you need to keep in mind when it comes to your salary break-up in terms of the new wage code:

➔ Anyone in search of a new job should look closer at the gross salary being offered and then request a breakup of the gross wages. You need to now look at the basic pay and the allowances being offered and see whether they align with the new wage code of 2021.

➔ Take a look at whether or not the company is offering you paid leaves and if you can cash those leaves in.

The employer’s contribution to your PF and pension schemes should be analysed too.

The New Wage Code has ushered many changes in terms of an individual’s take-home pay in India and this is why it is important to know all the aspects that could impact your salary. Staying on top of such information can help you make better decisions on your work front and help you earn a salary that will help you sustain a lifestyle conducive to your needs.

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