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How New Labour Code Will Impact You Financially?

Author: Balwant Jain/Wednesday, January 13, 2021/Categories: Exclusive

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How New Labour Code Will Impact You Financially?

While making payment of salaries in the private sector, the employers generally restrict the component of basic salary to bare minimum level to keep their own contribution to Employee Provident Fund (EPF) as well as payment of Gratuity, which will be paid when the employee leaves the company. The balance part of the salary is paid to the employee in the form of various allowances like house rent allowance (HRA), conveyance allowance, leave travel allowance and special allowance being the biggest component for people in high salary range. The employee doesn’t object to the employer keeping his basic salary at bare minimum because he feels that to that extent his own contribution towards Employee Provident Fund comes down and his in hand salary goes up. Since the salary is understood in terms of cost to the company (CTC), in the private sector, in which even the employer’s contribution to EPF is also considered to be part of the CTC. Keeping the basic salary to bare minimum level keeps employer and employee both happy without the employee realising its long-term implications. In order to simplify and consolidate the various labour legislations the government has introduced four codes collectively known as labour codes. These codes have put a cap on the quantum of allowance, which can form part of salary in relation to the basic salary. This single change in the definition of wages i.e. salary in labour laws will have significant impacts for the employees in the long run. Let us understand the provisions and its implications on the employees.

What will change once the code comes into effect?

For the purpose of computation of various benefits to the employee all the four codes have common definition of wages. In order to ensure that the various component of salary of an employee are not arbitrarily structured to minimise the cost of the employer when it comes to providing various the law has put a cap on the various allowances which can form part of the salary. Under the code, salary has to be structured in such a way that various allowances shall not be exceed than 50 per cent of the salary of the employee. Any excess shall be treated as part of the basic salary. In other words aggregate of the basic salary and dearness allowance shall not be less than the various allowances. These allowances may be called by any name whether special allowances or any other name. There is no blanket ban on payment of special allowance, but aggregate of all the allowances shall in no circumstances exceed the amount of basic salary and dearness allowance taken together. The allowances may include commission, HRA, conveyance allowance or travel allowance, etc. Even contribution made by employer towards EPS and pension account of the employee will be taken into account while computing the threshold limit.

Impact of such changes on the salary of the employees

With increased proportion of basic salary in the overall remuneration package, the employer contribution to various retirement schemes like EPF/NPS (National Pension Scheme) will go up in monetary term. Likewise, the contribution of the employee will also go up correspondingly. Since remuneration packages in private sectors is computed as CTC, the in hand salary of employees will go down significantly due to increased contribution of employer and employee towards their retirement schemes specially for those employees whose salary structure is skewed and the contribution towards EPF is made on the threshold limit of Rs15,000.

This will have other implication as well. Within the same CTC, the salary in hand as well as his tax liability will come down due to increase employer contribution to EPF, which is not treated as salary under the tax laws. One major benefit for the employees in private sector will be that they will be able to accumulate large retirement corpus under NPS/PF.

Moreover, these employees will be eligible for a lower home loan as the home loan eligibility is considered on the take home salary. The impact of these changes on the salary of employees can be better understood from the following table for a person whose CTC is assumed to be Rs12 lakhs per annum. His basic salary is Rs15,000 presently on which his EPF contribution is made by both the employee and employee.

From the above table, computation becomes apparent that with the same CTC his take home salary will be lower, but will be entitled to higher Gratuity in case he leaves the organisation after five years. It also becomes clear that that he will be able to save more Income-Tax (I-T) every year because of higher component of employer’s contribution to provident fund which does not form part of employee’s salary. Since employer and employee both are contributing higher amounts to EPF part of which goes to EPS, he will get bigger amount as retirement corpus from EPF as well as higher pension from EPFO. I am sure the new Labour Code will certainly help employees in saving tax and better retirement planning.

The writer is a tax and investment expert and can be reached on


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