Your Take-Home Salary May Reduce From April Next Year

Your take-home salary might come down from the next financial year. This is because companies are set to restructure their employees' salary packages to align them with new wage rules proposed by the government. According to the draft rules, part of the Code on Wages 2019, the allowances component of an employee's gross pay — or total cost to company (CTC) — cannot exceed 50 per cent of the total compensation. The basic salary has to be 50 per cent of total pay.

Simply put, employers will have to allocate 50 per cent of an employees' gross pay to the basic salary.

Currently, most private companies prefer to set the non-allowances part of total compensation as less than 50 per cent of an employee's CTC, keeping a higher portion for allowances.

The new rules, which are set to come into force on April 1, 2021, also mention a consequent increase in gratuity as well as provident fund (PF) contributions.

Financial experts, however, say the new measures will help in improving the social security and retirement-related benefits for the salaried.

"Though the new wage code will give more social security to the employees at the time of retirement by way of increased corpus of gratuity and provident fund, it will reduce the monthly net take-home salary because as proposed 50 per cent of total salary to be considered for the purpose of contributions to retirement funds," Gopal Bohra, partner in Mumbai-based professional services firm NA Shah Associates, told NDTV. 

A higher allocation for retirement planning will translate into a proportional reduction in the employee's take-home salary, also known as "in-hand" salary.

The Code on Wages — aimed at consolidating and simplifying a number of old labour laws — was approved by Parliament last year. The final rules will be notified by the government after taking public comments into consideration.