How your salary structure may change with the new salary code
The typical salary structure can be confusing for most employees. There is something called the “base salary”. Then there are allowances such as housing allowance (HRA) and transport allowance. There is also a provident fund (PF) deduction and, depending on your annual investment return, a withholding tax (TDS) amount. Some of this is expected to change with the implementation of the Wage Code, 2019. The Code will be implemented once the various Indian states notify the rules under it and this is expected to happen soon. In this article, we’ll help you understand your payslip and tell you which parts of it might change.
Base salary
Generally, this component of your salary will be set at 35 to 40% of your actual salary. This is important because the provident fund deduction is calculated as a percentage of base salary. By law, your employer must deduct 12% of your base salary for the provident fund contribution (employee’s contribution) and match it with 12% (employer’s contribution). Companies prefer to keep the base salary low as it also keeps the FP deduction low.
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According to some interpretations, the 2019 Wages Code requires that base salary be at least 50% of your total payroll. However, companies seem to have taken a different view on this. The “State of Pension Benefits in India 2021-22” – a survey conducted by WTW, a multinational risk management, insurance brokerage and consultancy firm – reveals how companies plan various policies related to wages and benefits in response to labor codes. In this survey, only 31% of respondents said they would increase the base salary.
“Companies may nevertheless have to provide benefits such as gratuity by linking it to the new definition of salary – the gratuity is at least 50% of the total salary according to the Salary Code – but they cannot formally increase the salary component base,” said Ritobrata Sarkar, retirement manager at WTW India. “A number of benefits like superannuation can be tied to base salary, so companies are reluctant to increase this component immediately,” he added.
Transportation
This allowance, as part of your salary, is fully taxable. There was a deduction for transportation allowance of up to ₹1,600 per month, but it was merged with the standard deduction in the 2018 budget. However, transport allowance does not fall within the definition of salary under the Wage Code and therefore companies continue to treat it a separate component.
PF contribution
The PF deduction is set at 12% of your base salary. For example, if your base salary is ₹25,000, your PF contribution will be ₹3,000. The employer will deduct this amount from your salary and credit it to your PF account. The employer will also combine this with another ₹3,000 per month on his side. It seems simple enough. But another pension rule allows employers to limit FP contributions to 12% of ₹15,000 per month (or ₹1,800 per month).
Some employers exceed this limit of ₹15,000, while others credit PF contributions against the actual base salary. The changing definition of salary does not affect the ₹limit of 15,000. The WTW survey showed that 46% of respondents planned to continue deducting PF dues in accordance with current regulations. Only 13% said they would contribute to PF under the new salary definition. Another 32% said they weren’t sure what to do.
Tip
The gratuity is governed by the Payment of Gratuity Act 1972. It is determined by a formula. The formula is last salary taken * 15 * number of years of service divided by 30 (26 for those under the Payment of Gratuities Act 1972). For example, if your last salary received was ₹50,000 and you have worked for the company for 5 years, your gratuity comes to ₹1.25 lakh. In addition, a ceiling of ₹20 lakh applies for tip.
The Social Security Code, 2020 has removed the minimum membership period of 5 years to be eligible for the gratuity. Those working for shorter periods on fixed-term contracts will also be eligible for the gratuity. Second, the labor codes read together stipulate that the gratuity must be calculated on the “deemed” base salary which cannot be less than 50% of your total salary. Therefore, if your total salary is ₹2 lakh and the basic salary is ₹50,000, the bonus will be calculated on an amount of ₹1 lakh (50% of the gross salary of ₹2,000,000). This will significantly increase the tip you are entitled to.
The WTW survey showed that 40% of respondents expect a significant impact on their profits from additional tip payments.
