The new wage code mandates that basic pay will have to make up 50% of employees' CTC.
The implementation of the new wage code has already made a lot of news in recent days, but the central government is yet to make any announcement in this regard. The point to be noted, however, is that whenever the New Wage Code gets implemented, it would be a huge relief for the private sector employees. The new wage code mandates that basic pay will have to make up 50 per cent of employees' CTC. In other words, it has a provision that says one's basic salary would be at least 50 per cent of the net CTC.
This will also lead to Provident Fund balance accumulation as the Employees Provident Fund (EPF) rule will still press for 12 per cent monthly PF contribution of the basic salary by both employer and the employee.
1. Huge relief to EFP account holders
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As per the EPFO rules, the entire PF withdrawal is tax exempted and hence this rise in EPF balance due to the implementation of the new wage act is going to provide huge relief to EPF account holders.
2. Retirement Fund accumulation
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This would become possible as the monthly EPF contribution of an employee will go up, leading to a higher EPF balance at the time of retirement.
3. PF calculation according to the New Wage Act
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Let's assume an EPF account holder is 35 years old and monthly salary is Rs 60,000. In that case, if the yearly increment is assumed at 10 per cent, keeping current 8.5 per cent PF interest rate for the coming period, then due to the new wage code implementation, one's net PF balance at the time of retirement will be Rs 1,16,23,849.
4. Comparison
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Comparing this PF balance with the current EPF contribution, which is not more than 30 per cent in the majority of the EPF account holders, the EPF balance post-retirement of the same employee in the current circumstances will be Rs 69,74,309.
5. Understanding the New-Wage Code
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Under the Code on Wages 2019, wages will include three components - basic pay, (inflation-linked) dearness allowance and retention payment. While it envisages all remuneration provided to employees, it excludes bonuses, pension and PF contributions, conveyance allowance, HRA or housing benefits, overtime, gratuity, commission, retrenchment compensation and such other things.
6. Allowances
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The new wage code mandates that basic pay will have to make up 50% of employees' CTC. Allowances to employees, like leave travel, house rent, overtime and conveyance, will have to be limited to the remaining 50% of CTC. If any of these exemptions, in aggregate, exceed 50% of the CTC, the extra amount will be deemed as remuneration and will be added to the wages.
7. Gratuity
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As per the new wage code, gratuity will also undergo certain changes. Gratuity will have to be calculated on the basis of a larger base, including basic pay as well as other allowances of wages such as travel, special allowance, etc. This will add to the gratuity cost of companies.
