India’s new salary rules are likely to come into effect tomorrow.

After the government notifies it, the new wage regime will usher in changes to salary structures of most of India Inc.

These new rules are part of the Wages Code that Parliament passed last year. Once they are implemented, Indian companies/employers/workers will see changes in such components of compensation as take-home salary, provident fund and gratuity, pay slips, etc. As a result, the balance sheets of India Inc will also be impacted.

The Wage Code deals with both government jobs as well as private sector jobs.

Under the new definition of wages, allowance will be capped at 50% of total pay. For the private sector, starting April 1, the basic pay component will have to be 50% or more of total salary of a worker. For government employees, this basic pay will mean basic pay + DA, which together will have to be 50% or above.

Decoding new salary math

Staffing companies and HR professionals say that the new salary regime will cause changes to most pay structures in the country. Currently, for an overwhelming number of employees, the basic pay component is significantly lower than 50%.

As per various staffing firm data, allowances sometimes make up as much as 80% of compensation for high-earning employees. Such employees are set to take the most noticeable hit on take-home pay.

Besides, Provident Fund contributions of both workers and companies will rise following the implementation of the code. Therefore, the take-home salary of most workers will likely fall.

All in all, while employees will have to brace for take-home pay going down, companies will have to brace for an increase in costs as their PF contributions rise. Along with this, companies will take another hit as well — as basic pay goes up, the gratuity payout to workers also will, because gratuity is calculated based on basic.

The social security kitty for workers will also be bigger now, making for an additional hit on companies. Under current practices, salaries are structured in such a manner that the employer’s social security contributions are lower.

Balancing the impact

The new rules will likely increase the cost to companies by an average 10%, according to an HR expert, because higher payroll costs will inflate the wage bill for most employers.

According to various report, companies have already begun to explore ways in which to tweak compensation package so that the cost could be kept lower.

There will also be a host of positives emanating from the new rules, some experts say. One of them is that employers will now find it easier to be more compliant and employees will have more social security, Suchita Dutta, executive director of the Indian Staffing Federation, told ET sometime back.

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