Wage War: How New Labour Codes Will Affect Your Life?

The New Code on Wages will impact the salary of the employees directly. It is said that with the new codes, while your CTC remains the same your take-home salary will go down.

2020 has been a year where we saw massive job losses, pay cut and rising unemployment. As a result, people decided to cut down on spending and focus more on savings. On the other hand, you might have heard the term that there is no liquidity in the market. That means there is not much cash in the market.

While, as I said, in 2020 the majority of the people saw an impact on their pockets, 2021 could take this impact a step further as far as cash in hand is concerned. Why and How we will explain in this video today in detail but before beginning let me make it clear that whatever we are going to discuss today can be looked at from two perspectives and both the perspective we will discuss in detail.

Let us go back to 2019 when the govt brought a few changes to the labour codes. The four labour codes subsume 29 legislations were compiled into one. It is known as Code on Wages, 2019. It was passed by the parliament last year. Before this Code came into place, there were four different labour codes, The purpose of each of these varied and hence the definition of wages under many of these regulations was also different. Now under the new code, there is a uniform definition of wages across all these regulations. The code is likely to be in force by April 2021. And thus it is important to understand how it is going to affect both employers and employees. We will, however, focus on how it is going to affect the employees and while we understand that we will also try and tell you how it is going to affect the firms.

Impact on Employees:

The New Code on Wages will impact the salary of the employees directly. It is said that with the new codes, while your CTC remains the same your take-home salary will go down. To understand this, we will explain it using an example. but before that let’s get some basic fundas clear.

First of all, there is something called CTC (Cost to Company). When an employee is hired, the CTC is discussed with them. This is a negotiation that differs from employee to employee. This is the overall cost that company incurs to hire an employee’s services.

Your CTC includes different components. Some are direct benefits, some are indirect and some are saving contributions.

The direct benefit is basically the money that you receive in your hands, indirect benefits is more of insurance, coupons, subsidy on loan etc and saving contribution is your PF, gratuity etc.

Now there is something called Basic salary. Basic salary is something that is a fixed income that you get. It will not vary and remains a constant always. The entire amount of your basic salary will be part of your in-hand salary.

Then there are allowances. These you receive to help you take care of your basic needs.

This includes a number of allowances. House Rent Allowance (HRA), Leave Travel Allowance, Dearness Allowance, Medical Allowance, vehicle allowance, Mobile Phone allowances, conveyance allowances, etc….there is a whole big list of these allowances.

Now let’s understand the Math. For example, Person A” has a salary of monthly 30,000 i.e the CTC. Let us divide it into two components i.e.Basic Salary and Allowances. As per the new code, your allowances cannot be more than 50%. That means your basic salary will also be 50%. Earlier, for the purpose of tax benefit, employees and employers would agree to keep the basic salary percentage slightly lower.

So let’s consider two cases: Case 1: For the sake of calculation let’s consider your Basic salary was calculated at 40%. That means your allowances and saving contributions totalled to 60% of your salary. Your CTC is 30,000/ month. that means, your basic salary comes to 12000 and Allowances etc, the balanced salary is 18000. We all know that there is something called a Provident fund that is deducted from our basic salary. So PF percentage is 12%. That means, 1440 rs will be deducted from our basic salary. That leaves us with net salary: 28560 Rupees

Additionally, the company will pay from its pocket its PF contribution to match up to your contribution

Now, Let’s understand CASE 2: Here, as per the new wage code mandate, your basic salary has to be 50% of your total CTC. That means your Basic salary, in this case, is 15000 and allowances are 15000. If we calculate the PF on Basic salary it comes to 1800. So, deducting that from your basic salary leaves you with net salary 28200. Your net salary is your cash in hand.

In Case 1, your cash in hand was 28560 and in the second case, your cash in hand is 28200. Basically, your PF contribution will go up and thus, your take-home salary will be less. This will also affect your taxation.

Now let’s understand the other perspective: The government says while it is a cut to your pocket now, this will give you long term benefits since your PF contribution and other contribution will be more so you will have a sort of retirement corpus ready with you. Currently, private companies keep the Basic salary as low as 20%. So there is less PF contribution from your side and to match up to that, their contribution to PF also remains lower. With the new wage code, Companies’ PF contribution will also go up. some large companies in the formal sector already keep basic pay at 50%. For those firms, the need for revamping salary structure may not arise. But, the govt says those who take the easy way out, such companies will be forced to keep your basic pay at 50% and increase PF contribution. This in turn will benefit the employees as the social security net will be strengthened in a long term. Fair enough. So there are two points- 1. With new Wage code, your take-home salary is set to go down and 2. Your retirement corpus will be bigger.

Now, what are the concerns surrounding the codes? The PF amount that is deducted from our salary and contributed by the employer or any such deduction… what happens to it? The Money remains with the Central govt. The govt then invests it in several bonds or other such schemes to earn money out of it. In turn, it also offers you some interest on it. The new wage code means govt will also have more money parked with it. Why does govt want more money at a time when we are hit by pandemic and experts are saying that there should be more cash given to people? Well, that’s because India’s fiscal deficit has risen. As per the latest report, the fiscal deficit came in at 120% of the target in October, data released by the Controller General of Accounts on Friday showed. At Rs 9.5 lakh crore, the deficit grew five percentage points over the previous month. So the govt has less money and to keep the functioning going it needs money.

Now, do you remember the math of MSP and govt spending on Farm produce when it purchases on MSP? Critics say that govt doesn’t want to continue MSP, as it may not have enough money to buy it. And thus the introduction of private players in the new farm laws. Right, wrong otherwise, I am not going into the debate as of now, but this is what critics point out to. Many of these steps are being taken so that the govt could meet its fiscal deficit. But that is definitely going to affect your pocket too in the short run.