New change in law likely to lead to change in wage structure by employers – The New Indian Express
BENGALURU: With Parliament giving its approval to the wage code bill last year, the resulting changes in wage and bonus rules are likely to push companies to restructure wage structures. According to experts, these changes could result in employees receiving lower net salaries from the next financial year (April 1, 2021).
Experts note that the new rules will lead to changes in pay slips, cash registers, gratuities and provident fund (PF) payments, and even the balance sheets of private companies. The new rules state that the severance portion of salary should be capped at 50%. On the other hand, the base salary should be 50 percent or more. Traditionally, companies keep the severance component of wages higher, resulting in more wages on hand for employees.
However, the new wage codes aim to increase the contribution to means such as the PF and gratuities, which could also have an impact on the liabilities of the employer companies. In the current structure, the base salary represents on average 30-40% of the total salary, which in turn determines the gratuities and PF received. According to the Payment of Bonuses Act 1972, bonuses are calculated at 4.81% of base salary. Most businesses with 10 or more employees are regulated by law. This is often payable to employees who have completed a term of 5 years or more with the company.
The Employees Provident Fund (EPF), meanwhile, constitutes a minimum of 12 percent of base salary, which can be withdrawn at least one month after the end of service or upon retirement. Base salary is determined based on the employee’s designation and the industry in which they work. Most other components, such as allowances, are based on base salary.
This amount is fully taxable. Indemnities, for their part, will be due to employees during their service and may be fully or partially taxable depending on their nature. This component of the allowance, such as housing rent, transportation, and other expenses, is usually determined based on each company’s particular policies.