Wage code Bill ,2019 was passed in Indian Parliament during 2019, but it is expecting to come in to force by April ,2021 across India as per the statement of Finance minister during budget speech 2021. This bill suppose to be imposed during 2020 but due to Covid-19 pandemic outbreak it was not imposed.
What major thing in bill impacted the salary process
According to the Wage bill, 2019 companies should not keep their bonus and allowance more than 50 % of Total CTC . Basics and Dearness allowance should be kept 50% of CTC.
But as of now private sector employers use to keep Basic as 25-40% and remaining things they will keep as house rent allowance, Personal allowance and other allowances category(LTA, Telephone reimbursement etc..) , so that employee can avail max tax benefits.
This will impact central government and private sector employees. Let us discuss the changes employee and employer need to face on this bill
Employee’s
- Take Home salary will decrease
- Provident fund / Retirement fund contribution will increase
- Gratuity will increase and now employee are eligible to withdraw this even after completing one year , no need to wait for 5 years like before.
Consider the below example, Employee A’s CTC is 10,000,00 and basic is 40 % and if it will change to 50%, then look at the impact on take home salary
| Total CTC | 40 % of CTC | 50% of CTC |
|---|---|---|
| Basic | 4,00,000 | 5,00,000 |
| PF | 48000 | 60000 |
| Employer PF | 48000 | 60000 |
PF from both employee and employer side will increase by 24,000 , that is 2,000 per month take home salary will decrease.
Most of the private sector companies will deduct employer contribution of PF and gratuity also from CTC of Employee.
Employer’s
- Employer may have to pay leave encashment, bonus, and gratuity at a higher rate and thus burden on employer will increase.
- Employer side Provident contribution also will increase.
Ex. Companies will give any one time bonus or leave encashment on top of Basic+DA. Recently Accenture has announced one time bonus of 1 week Basic pay to their employees , while doing leave encashment also based on Basic salary companies will consider.
Indirect impacts on this bill for employees
HRA chargeable to tax may alter – For example HRA is 40% percent of Basic for non metro cities and 50% for metro cities , if you are paying more rent it will be useful ,because more HRA will be charged , but the employee who is paying less rent can charge less HRA ,thus may increase tax. The person who is having home loan don’t have to consider this HRA implications.
Tax may increase – If more salary is on allowance side one can get more exemptions from tax , now allowances are restricted to 50% may increase taxable amount. But this will impact more on higher tax slab employee’s. Out of increased percent in basic only 12% is non taxable due to PF , but remaining amount one cannot able to show under any non taxable part. PF more than 2.5 lakh per year is also now taxable according finance minister budget speech 2021, this also lead burden for employee on tax side.
Any ways it is the government rule ,that we need to follow, so we need to plan our personal finance and tax accordingly. Employees will get structure change in salary from their employer shortly , after that please do your tax declarations accordingly and wait for the April 2021 salary to get know about your take home amount.
One can contact me to get exact take home salary according to their CTC structure.