Why India's new labor codes could lower your take-home pay
What's the story
India's recently implemented labor codes, aimed at simplifying and modernizing 29 existing laws, include changes to salary structures. The new regulations mandate that basic pay should constitute at least 50% of an employee's total cost to company (CTC). This change is likely to affect the way employers structure salaries and could indirectly impact future salary hikes.
Salary adjustments
The impact of new labor codes on salary structures
Traditionally, many companies have kept basic pay low and filled the rest of the CTC with allowances. This practice keeps mandatory deductions like provident fund (PF) and gratuity contributions relatively smaller. However, with the new rule in place, employers will have to adjust their salary structures. This change will increase statutory contributions without changing your CTC on paper.
Salary impact
How new labor codes could affect take-home salaries
The new labor codes will increase the portion of an employee's salary on which PF and other deductions are calculated. This means that even if the overall CTC remains unchanged, the take-home salary could decrease slightly. Analysts believe this change could indirectly limit the scale of future salary hikes or at least alter how they are planned by companies.
Budget constraints
Companies may struggle to increase gross pay
The new labor codes could make it difficult for companies to increase gross pay beyond statutory bumps. This is especially true for firms with tighter budgets and rising compliance costs under the new framework. However, it's worth noting that higher basic pay will lead to greater contributions toward PF and gratuity, potentially boosting retirement savings in the long run.
Employee assurance
Labor ministry reassures employees about take-home pay
The labor ministry has attempted to reassure workers that for many employees, especially those whose PF contributions are capped at the statutory wage ceiling, take-home pay won't change much. As these rules come into effect, both companies and salaried workers will be closely observing how salary negotiations, pay hikes, and in-hand incomes are affected by India's latest labor reforms.