When will government notify the final rule?
The Code on Wages Bill, 2019 which was passed in the Parliament last year is likely to come into effect from April 1, 2021, substantially affecting companies struggling due to pandemic. The government is expected to notify the final rules of the Code on Wages after considering the feedback from public. Most companies in the formal sector are already going by this rule related to PF contribution.
What are expected changes?
As per the report in business daily Mint, the government has proposed certain changes in the wage structure. According to the draft rules, wages for the purpose of calculation of gratuity and provident fund contributions will have to be at least 50% of employees’ total pay. In tune with this proposal, employers will have to increase the basic pay component of salaries, leading to a proportional increase in gratuity payments and employees’ contribution to the provident fund.
It means that basic pay will be 50% or more of total pay which will lead to the change in salary structure of most employees as the non-allowance part is usually lower than 50%. Also, if you you jump in the salary bracket, the share of allowances in total compensation goes even higher.
Since provident fund (PF) is based on basic salary, so it will see a rise, which means that the take-home pay will come down. But the post-retirement pay-out will go higher due to higher contribution towards PF and gratuity.
Most feel that the the new wage code will result in better social security and welfare benefits for employees.
How does it affect employers?
Companies will also see their cost rise as the contribution towards PF and gratuity increases.