Looming Labour Code Changes May Boost PF Contributions: A Guide to Mitigating Take-Home Pay Impacts for Employers

New Labour Codes Bring Changes to Salary Structuring

The introduction of the new labour code has significant implications for salary structuring in India. The code defines wages as including most parts of an employee's salary, such as basic pay and dearness allowance, but excludes certain components like House Rent Allowance (HRA), bonuses, and allowances. However, if these excluded parts become more than half of the total salary, the extra portion will still be counted as wages for Provident Fund (PF) and gratuity.

The impact of the new labour codes on employer contributions will largely depend on how the wage base is managed. A higher wage base directly increases statutory contributions, such as the provident fund and gratuity. Employers can manage this impact through thoughtful structuring, say experts.

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Restricting provident fund contributions to statutory minimum levels is one way employers can manage the impact of the new labour codes. Companies can choose to restrict PF contributions to the statutory minimum levels, and where both employer and employee mutually agree, contributions need not be linked to a higher wage base. This helps in controlling employer cost while preserving employee take-home pay, particularly in higher salary brackets.

Even with the new rules, the current PF limit of Rs 15,000 is still in place for now, so in many cases PF may continue to be calculated like before. The existing EPF Scheme, 1952, is expected to continue to apply during the transition period until a new scheme is notified.

Protecting employee take-home pay is crucial, and companies are exploring ways to give employees extra benefits without increasing salaries or PF burdens. Tax-efficient components such as HRA, meal benefits, fuel reimbursements, car lease, and mobile/device leasing allow employees to maintain or even improve their net take-home under the current income-tax framework.

Companies are now looking for ways to give employees extra benefits without increasing salaries or PF burdens. Employee wellness and benefit programs provided over and above the Cost to Company (CTC) are becoming increasingly popular. When structured appropriately, these benefits can deliver value to employees without being treated as wages or taxable income, thereby avoiding both tax and labour law implications.

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In summary, the new labour codes do not mandate a shift to 50 percent basic pay. Instead, they require compliance with a wage definition framework, which can be achieved through intelligent structuring. The outcome will be a more balanced compensation model where exclusions are adjusted with inclusions, rather than a blanket increase in basic salary, say experts.

Employers who proactively redesign compensation using a mix of statutory compliance and tax-efficient components will be better positioned to manage costs while protecting employee take-home pay.