Personal Finance: How will the new wage code affect retirement funds?

The new wage code, which is expected to be implemented this year, will most likely have an impact on the employee's retirement fund. Continue reading to learn more.

According to experts, the new wage code may not necessarily result in higher provident fund contributions for all. The new wage code is one of four labour codes that are expected to go into effect this year.

These four codes, which cover occupational health, social security, and industrial relations, were passed by the parliament in 2019 and 2020. Some of the important aspects of employment, such as working hours, leave policies, and even pay packages, are likely to be heavily impacted by this.

However, the implementation date is not yet known. However, Rameswar Teli, Minister of State for Labour and Employment, stated in a media interview that the codes will be implemented in 2022.

One of the major changes in the new wage code is the definition of wages. Currently, the basic salary in a private organisation ranges from 25% to 40% of the total cost to the company (CTC).

According to the new wage code, basic pay must account for at least 50% of total remuneration. As a result, provident fund contributions and gratuity calculations are more likely to be affected.

However, it is not expected that it will affect all employees. This is due to the fact that if the basic pay exceeds Rs 15,000 per month, the contributions to the provident fund will remain unchanged.

Furthermore, gratuity is calculated as a percentage of your last drawn salary and the number of years of service. This can, however, be limited to Rs 20 lakh per employee. However, because the wages under the new wage code are higher, the gratuity payout would be higher as well.

More importantly, if the gratuity is part of your total CTC, the company will most likely adjust it against other heads such as special allowances or business allowances. In fact, this will result in a lower take-home pay for employees whose CTC includes a gratuity.