Take Home Salary: Get ready to take a hit from next fiscal year

Private sector employees should brace for some bad news as they might have to deal with cut to their ‘take home salary’ which will be adjusted according to the new wage rules in the country. From next fiscal year, the new compensation rules are part of the Code on Wages passed by Parliament last year will come into effect.

According to this, allowances shall not be over 50 per cent of the total compensation and basic pay will need to be 50 per cent or higher from April next year. However, according to this new Code, employees are set to get higher gratuity payments as well as employers’ contribution to the Employees Provident Fund (EPF) is also set to increase.

“The labour code indicates that if the ‘wages’ bucket falls below 50% of the remuneration, then some portion of components excluded from the ‘wages’ bucket will be added to it so that this bucket becomes at least 50% of the remuneration for the purpose of calculating different payments such as social security contributions, gratuity, leave encashment, etc," said Anshul Prakash, partner (employment labour and benefits) at Khaitan & Co, was quoted as saying by HT Mint.

Normally most companies keep the non-allowance part less than 50 per cent and that’s why a change in the salary structure is in the offing. The basic pay shall be revised upwards which will result in an increase to PF contribution but ‘take home salary’ will take a hit.

“The new definition will do away with the current practice of structuring salaries with higher allowances to lower social security contributions,” the Economic Times quoted an unnamed senior government official as saying.

Payroll experts believe that new rules may result in the restructuring of salaries for employees whose employers are contributing to the provident fund (PF) based on actual salary.

It is voluntary on part of the employer and employee to make PF contributions on actual wages in case the monthly salary of the employee is over Rs 15,000. The employer and employee PF contribution can be limited to 12 per cent of Rs 15,000.