Will new labor laws reduce your take-home salary? Find out
What's the story
The Indian government has introduced a set of labor reforms under four new Labor Codes, replacing outdated laws with a comprehensive framework. The changes affect wages, leave policies, working hours, and workplace safety. They apply to all kinds of workers, permanent employees, contractual workers, and those in specific sectors like media or plantations. The notification was issued on Friday.
Salary implications
Impact on employee salaries
The new labor laws could require companies to ensure that an employee's basic salary accounts for at least 50% of their total cost-to-company (CTC). This could lead to changes in how pay packets are structured. As a result, many employees might see a gradual decrease in take-home pay as contributions toward retirement savings are likely to increase.
Wage adjustments
New wage definition and its impact on salaries
With the new wage definition coming into effect, many employees are curious about its implications for their salary structure. The Code on Wages mandates that an employee's basic salary should be at least 50% of the total CTC or as per government notification. This change is expected to increase mandatory retirement contributions such as provident fund (PF) and gratuity, which are calculated on basic pay.
Impact on earnings
Higher contributions and reduced take-home pay
While the change aims to enhance retirement benefits, it could also lower take-home pay as additional contributions will come from the existing CTC. The rule seeks to prevent organizations from keeping basic salaries low and increasing allowances to limit their PF and gratuity obligations. Experts predict employees may witness a decline in take-home pay as both PF and gratuity contributions rise under this new structure.
Employer influence
Employers' role in salary restructuring
Alay Razvi, Managing Partner at Accord Juris, clarified that the impact on take-home pay would depend on how employers restructure salaries. If they pass on the increase in deductions without raising gross salary, take-home pay will reduce. He also warned that if more allowance components are added to the wage base due to this 50% rule, they may be subject to PF or other deductions further reducing net salary.
Code changes
New labor codes and wage definitions
Suchita Dutta, Executive Director of Indian Staffing Federation, said the new labor codes standardize the definition of "wages" under the Code on Wages and Social Security. This would mean better retirement security through higher gratuity and provident fund but a possible dip in take-home pay if employers restructure allowances downward to offset costs. Anjali Malhotra from Nangia Group explained that wages now include basic pay, dearness allowance, retaining allowance; 50% of total remuneration shall be added back to compute wages.
Wage standards
Universal minimum wage and gender equality provisions
The new labor codes introduce a universal minimum wage for organized and unorganized sector employees. The government will set a statutory floor wage based on minimum living standards, which states cannot fix below this level. The codes also include provisions for gender equality, preventing discrimination in hiring, wages, or employment terms for similar work. Wage payment rules now cover all employees earning up to ₹24,000 per month, ensuring timely payments and prohibiting unauthorized deductions.