How New Labour Codes Will Reshape Employee Compensation

The impending rollout of the four new labour codes—the Code on Wages, the Code on Social Security, the Industrial Relations Code, and the Occupational Safety, Health and Working Conditions Code—is set to fundamentally reshape the structure of compensation for millions of organized sector employees in India.

The codes aim to consolidate decades of complex legislation and enhance social security.

However, a key implication—particularly due to the Code on Wages—involves a potential reduction in monthly take-home salaries for many workers.

Labour Codes: The 50% Wage Ceiling Mandate

The core change stems from a provision in the Code on Wages.

This provision mandates that the ‘basic pay’ component of an employee’s salary must constitute at least 50% of their total gross salary.

This move is designed to curb the practice by many companies of classifying a large portion of compensation as allowances (such as house rent allowance or travel allowance).

This practice was used to minimize the base amount on which statutory contributions are calculated.

Currently, many firms keep basic pay significantly lower than 50% of the gross salary.

By requiring this floor, companies will be forced to restructure pay packages, thus increasing the basic wage.

This consequently increases the statutory contributions the employer and employee must make towards schemes like EPF and gratuity.

Impact on Take-Home Salary and Retirement Savings

For the employee, a higher basic pay translates directly into higher monthly deductions towards EPF and other social security schemes.

This means that while the CTC remains the same, the in-hand or ‘take-home’ salary will see a dip.

For instance, an employee earning Rs 100,000 gross salary whose basic pay was previously 30% might see their EPF contribution jump from approximately Rs 3,600 (employer + employee contribution).

This could increase to over Rs 12,000 or more.

However, this short-term reduction is offset by a substantial benefit: significantly higher retirement savings and terminal benefits.

Since gratuity and provident fund benefits are calculated based on the higher basic wage, employees will accumulate a much larger retirement corpus.

They will also receive greater payouts upon leaving the service.

This ultimately offers enhanced long-term financial security.

Potential Tax Advantages

Interestingly, the reduction in take-home pay may come with an often-overlooked silver lining: lower tax outgo.

The increased contributions to the EPF are eligible for deductions under Section 80C of the Income Tax Act. This deduction is available up to a limit of Rs 1.5 lakh per annum.

For employees who haven’t fully utilized their 80C limit, the mandatory increase in EPF deductions offers a quick and easy way. This helps reduce their taxable income.

This change could potentially push them into a lower tax slab or increase their net savings.

The new codes essentially transform a portion of the current take-home cash into a tax-efficient, locked-in retirement asset.

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