Gratuity, PF contribution may rise under new code

 Employees are likely to get higher gratuity payments and employers’ contribution to their retirement corpus may also rise, but workers should brace for a cut in their take-home pays once the government notifies draft rules under the Code on Wages 2019.

According to the draft rules, wages for the purpose of calculation of gratuity and provident fund contributions will have to be at least 50% of employees’ total pay. To comply with this rule, employers will have to increase the basic pay component of salaries, leading to a proportional increase in gratuity payments and employees’ contribution to the provident fund.

“The labour code indicates that if the ‘wages’ bucket falls below 50% of the remuneration, then some portion of components excluded from the ‘wages’ bucket will be added to it so that this bucket becomes at least 50% of the remuneration for the purpose of calculating different payments such as social security contributions, gratuity, leave encashment, etc," said Anshul Prakash, partner (employment labour and benefits) at Khaitan & Co.

The government will notify the final rules of the Code on Wages, which was approved by the Parliament last year, after taking into consideration the comments from public. “The 50% cap on non-basic pay component of an employee’s compensation will impact the gratuity component," said Amit Gopal, principal and India business leader, investments, Mercer.

Payroll experts said that the new rules may result in the restructuring of salaries for employees whose employers are contributing to the provident fund (PF) based on actual salary. Currently, it is voluntary on part of the employer and employee to make PF contributions on actual wages in case the monthly salary of the employee is over ₹15,000. The employer and employee PF contribution can be limited to 12% of ₹15,000. In such cases, PF contribution may not be impacted.

“If the employer/employee has currently opted to pay PF on the full basic salary instead of ₹15,000 per month, then restricting this back to ₹15,000 per month (or the new wage limit, if applicable) is likely to need a joint declaration with the employee," said Ritobrata Sarkar, head of retirement practice India at Willis Tower Watson.

However, some experts said that most companies in the formal sector are already abiding by this rule related to PF contribution.

“The formal sector already carries many of these in their structured CTC breakups, i.e. most employers (especially large formal ones) have basic at 50%, house rent allowance at 40-50% and then other special allowances," said Lohit Bhatia, president, workforce management, Quess Corp.

Many experts also said that the new wage code will result in better social security and welfare benefits for the employees.

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