New Labour Code: Salary Hikes and Take-Home Pay Implications

Salary Hikes May Not Translate to Higher Take-Home Pay for IT Employees

For many IT employees who received annual appraisals in April, the salary revision has come with an unexpected surprise. A higher Cost to Company (CTC) but a lower monthly take-home salary. Several employees say their increment letters read more like decrement letters, as, despite a rise in overall compensation, the amount credited to their bank accounts has fallen.

Industry experts say this shift is increasingly linked to companies realigning salary structures with the new wage definition under the labour codes. Many organisations are in the process of implementing the labour codes as part of their appraisal cycle, including aligning their compensation structures in accordance with the new wage definition. The final central rules have been notified, creating a sense of urgency for companies to adapt.

As companies recalibrate pay structures during appraisal season, employees may begin to notice changes in salary components rather than in headline salary figures. With this, employees may notice some changes in their salary components, especially because wages are now required to constitute at least 50 percent of total remuneration on which social security computation will be further made. This can result in a higher basic pay, which increases statutory contributions such as provident fund (PF) and gratuity, potentially reducing in-hand salary even when the overall CTC rises.

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The impact of the new labour code is significant, and companies are expected to rebalance salary components and optimise the mix of inclusions and exclusions to manage the impact on provident fund, gratuity, and other statutory contributions. This may involve using excluded components such as HRA, LTA, transport-related reimbursements, meal benefits, telecom reimbursements, car lease programs, mobile/device leasing, NPS contributions, and performance-linked pay within the permissible exclusion framework.

As shown in the table, some employees may see an increase in PF contribution, while others may not see any change. Employees whose basic salary is already above Rs 15,000 are unlikely to see any change in their PF contribution. Additionally, employees who are already contributing to PF only on the statutory cap of Rs 15,000 (12 percent of Rs 15,000) may also not see any change in their take-home salary even after the labour code changes.

To balance the impact of the new labour code, many organisations are increasingly using excluded components and providing employees a one-time option to choose provident fund contribution at statutory minimum levels. This approach can help increase employees' take-home pay while maintaining statutory compliance during the appraisal cycle. The focus is gradually shifting from simply increasing basic pay to designing smarter compensation structures that balance compliance, employee flexibility, tax efficiency, and overall cost management under the new wage code.

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