According to the new compensation rules as notified by the government under the Code on Wages 2019, the in-hand component of salaries of employees may reduce starting next financial year. Organizations would have to restructure the pay packages as according to the new rules, the allowance component cannot exceed 50 percent of the total salary or compensation and this basically implies that basic salary has to be 50 percent.
To be in compliance with this rule, employers will have to increase the basic pay component of salaries, which will result in a proportional rise in gratuity payments and employees' contribution to the provident fund (PF).
Retirement contributions would translate into lower take-home salary for employees but the retirement corpus of employees will grow.
Currently, most private companies prefer to set the non-allowance part of the total compensation less than 50 percent, and the allowance portion higher. However, this will change as soon as the new wage rules come to effect. The rules are expected to impact private-sector employees' salaries because they usually get higher allowances.
Employers will have to hike the basic pay of employees to meet the 50 percent basic pay requirement, according to the new rules.
The new wage rule could also elevate company costs towards salaries as they will have to contribute more towards employees’ PF and gratuity. Experts predicting salary costs incurred by companies to go up by 10-12 percent after the new wage rules are implemented.
While the new wage rules may cut take-home salaries of employees, experts have said that the new measures would help to provide better social security and retirement benefits.