New Labor Code: Will your salary increase or decrease, what will be the impact on the old and new tax regime, know everything?

Business Desk – New Labor Code: Discussions regarding the new labor code are intensifying in the country. The most important question related to its implementation is, will your basic salary automatically become exactly half i.e. 50% of your total CTC? The answer is, probably not. In fact, companies will restructure your salary in such a way that even if your ‘take-home salary’ reduces, your retirement fund (PF) will become stronger.

What is the new 50% rule?

According to the new labor code, your wages should be at least 50% of your total salary. If your allowances like HRA, conveyance, overtime pay etc. exceed 50% of your CTC, then that excess amount will be added to your ‘Basic Pay’.

Experts say that companies will not directly increase the basic pay to the 50% mark. Instead, they will make changes to parts of the allowance to ensure they legally comply with the new rules.

Why will take-home salary be less?

Even if there is no change in your total salary, the actual cash in your hands i.e. the money you get may reduce. The main reason for this is the contribution to PF (Provident Fund) and gratuity. From now on, PF and gratuity will be calculated based on this new definition of ‘wages’.

As the ‘wages’ portion increases, the portion deducted from your salary as contribution to PF will also increase. As a result, you will have less cash in your pocket in a shorter period of time. However, the value of your Provident Fund (PF) and the amount of gratuity you will receive at the time of retirement will increase significantly.

Why are companies not simply increasing the basic pay to 50%?

Companies are avoiding increasing the basic salary directly, because doing so can create many types of financial risks. By increasing the basic salary, the company will have to contribute more towards PF and gratuity, which will increase their ‘Cost to Company’ (CTC).

Additionally, since HRA (House Rent Allowance) is generally linked to the basic salary, a sudden and large increase in the basic pay can upset the entire tax structure. It is expected that companies will adopt a ‘balanced approach’ so that they can comply with the rules without any huge cost increase.

Effect of old vs new tax system

The effect of this change in salary will also depend on which tax system you choose. Under the old tax system, you could claim tax deduction (under Section 80C) on the increased PF contribution, which could provide some relief from your tax liability.

Whereas the deductions in the new tax system are less. The standard deduction of Rs 75,000 can help you reduce the shortfall in your take-home salary to some extent.

A new checklist for employees

Now, when you change jobs or get an increment, don’t just focus on CTC.

Consider these things also

• PF and Gratuity: Get an idea of ​​how much the company is investing in your future financial security.
• Fixed Pay vs Allowances: Decide how much of your salary is fixed pay and how much is allowances.
• Net Take-Home: Calculate the actual amount deposited in your bank account every month after tax and PF deductions.