New labour codes: Money9 decodes the impact on your take-home salary

With new labour codes coming into effect from April 1, employees’ concerns of a potential fall in their take-home salary alongside changes in tax implications needs a neat perspective.

Following a change in the definition of ‘wages’ under the new labour codes, employers are confused whether salary elements like leave travel, company-provided car, annual bonuses, house rent and other allowances fit into the new definition.

The Code of Wages, 2019 – as per the latest rule – includes three components: Basic pay, dearness allowance and retention payment. The 50% cap on exclusions and inclusion of remuneration in kind in the regular cost-to-company (CTC) structure has mainly caused corporate companies to rework on their monthly pay slip. With enforcement of new rules, the basic salary of an employee can at max be 50% of the total CTC. Other allowances would fall in the remaining.

Experts have pointed out that long term cost and tax implications for the employer as well as employees will be determined on the basis of how new wages are calculated. Employees are expected to receive lesser cash at the end of every month and higher gratuity payouts which will lead to higher tax liability at the time of its maturity. According to reports, initial estimates have indicated towards a 3% to 6% hike in overall employee compensation cost but singular impact on each salary component will still vary.

The biggest dilemma following the new rule might be this – if a company wants to keep the same CTC, the take-home salary will be lessened while if take-home remains unchanged, then overall CTC will increase. Experts are advising company heads to wait further until they get a clear picture on the new codes.

Money9 spoke to Rituparna Chakraborty, co-founder & Executive Vice-President, TeamLease Services Ltd, to get an idea how it would impact an employee.

1. How do you see the new labour codes impacting employees as well as employers?

The labour codes are an outcome of extensive unseen work and deliberations put together by the Ministry of Labour team to make them balanced focusing on a few points I mention below:

• Reduces complexity in compliance due to multiplicity of labour laws.
• Facilitates ease of doing business. India’s present ranking is 77 and the goal is to reach a position among the top 50 countries of the world.
• Employment generation without diluting basic aspects of securing employee rights, safety, security and health of workers.
• Standardisation of definitions under different labour laws.

The codes are for simplification, rationalisation and making it less cumbersome

2. What kind of tweaks can we expect related to take-home salaries?

Based on the new code, there would be little need for corporate India to have multiple layers and components in the wage structure and hence it is likely to see fewer components and allowances. The reason largely being that even before the labour codes, most of the elements were covered under the tax brackets.

For mid to higher wage employees (already in the formal job market), the net take home is likely to get reduced. However, overall remuneration consideration from employers shall increase by way of increase in social security benefits.

3. Do you think the new rules are likely to increase the employer’s liability towards retirement benefits?

Yes, on gratuity.

4. Do you think the new codes will make the remuneration packages simpler?

Most likely, it shall become simpler and there is little or no need now for having too many salary components in salary structure.