scorecardYour take-home salaries could shrink sharply from April with India’s new definition of wages — but companies are hoping for a delay
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Your take-home salaries could shrink sharply from April with India’s new definition of wages — but companies are hoping for a delay

India's new definition of wages could impact the cash-in-hand salaries that employees take home    BCCL
  • India's new labour codes, which include a revised definition of wages, are supposed to kick in starting April 1.
  • The new definition is expected to shrink your cash-in-hand salary at the end of the month but boost long term benefits like gratuity and leave encashment.
  • Indian companies are hoping that the implementation of these rules will get delayed as businesses are still reeling from the impact of the COVID-19 pandemic.
Indian companies are hoping that the government will delay the rollout of the country’s new labour codes or at least provide some clarity ahead of the April 1 deadline. If that doesn’t happen, it could mean a sharp cut in the cash-in-hand salary that you get to take home once the new financial year kicks off.

“Ideal would be if the rules get notified and everybody gets a little bit of a breather. The new legislation applies and only kicks in let us say after x,y, z days. That would be ideal but that's wishful thinking at this point,” said Shambhavi Solanki, vice president of corporate human resources (HR) at Policy Bazaar during The Indus Entrepreneurs (TiE) webinar on March 18.

Timing is a concern for most companies. Businesses are still reeling from the impact of COVID-19 and the pandemic is not yet over. “It’s going to be a crazy implementation and I have huge questions. And, I am worried, I am anxious, to be honest,” said Sagar Daryani, the co-founder and chief executive of Wow! Momos.

The National Association of Software and Service Companies’ (NASSCOM) Ashish Aggarwal believes that the rules are most likely to kick in May or June, as per his discussions with the government and the industry. “Overall, the labour codes are quite welcome. But, as with any new law, there are these initial stages where there is a lot of uncertainty,” he said.

India’s new definition of wages
The issue at the heart of the matter is the Indian government’s new definition of wages. It includes all remuneration, whether by way of salaries, allowance or otherwise.

Exclusions — like house rent allowance (HRA), provident fund (PF) contribution and others — still exist but can’t be more than 50% of your basic salary.

This means that even though companies have not been explicitly asked to redefine their compensation structure for employees, they may not have a choice but to take a second look.

According to Vishal Grover, a senior consultant at professional services firm Aon Hewitt, companies in India are currently considering three options:
  • A large part of the salary gets technically defined as basic pay, and the balance moves to exclusions.
  • They don’t change anything. They keep the structure as it is. But use the new definition of wages for all social security programmes.
  • A sort of a middle ground, where the basic is close to 50% and the balance of 50% is made up of exclusions.

InclusionsSpecified Exclusions
Basic payStatutory bonus
Dearness allowanceValue of house accommodation and utilities (light, water, medical, etc.)
Retaining allowanceEmployer contribution towards provident fund
Conveyance allowance
Sum paid to defray special work expenses
House rent allowance (HRA)
Remuneration payable under settlement
Overtime allowance
Retrenchment compensation

Take home salary most likely to take a hit under the new definition of wages
Under the cost to company (CTC) model, companies are likely to increase the share of salary that goes towards your PF. And, it will be at the expense of other allowances leading to lower take-home salary.

Depending on the ratio between basic pay and gross pay, the reduction in cash-in-hand salary to take home would range from 3% to 8% if PF contributions are increased, according to Grover.

This means that even if you get a wage hike in 2021, it's unlikely that there will be any major increase in the amount of money that actually gets deposited into your bank account.

The impact on long term benefits uncertain
The good news is that long term benefits like gratuity and leave encashment are likely to increase under India’s new definition of wages, especially if it's applied retrospectively.

GratuityOld definition of wagesNew definition of wages
Basic to gross ratio25%50%
Basic salary2550
Past service as on date10 years10 years
Accrued gratuity144.23288.46
Percentage increase in accrued gratuity100%

This means higher liability for companies, but more money on leaving an organisation for employees. However, the government is yet to clarify how the change in definition will be applied to such long term benefits.

“A lot of things are ambiguous right now until we actually have the draft rules out.” said Solanki.