As per the announcement made during the 2021 Union Budget, the New wage code 2021 has been proposed to be in effect starting from April. The New wage code is an attempt by the government of India to simplify the various regulations related to wages.

The meaning of ‘wage’ has been altered in the Wage Code Bill, 2019. Now, due to changes in the Basic Salary percentage, the changes in Provident Fund contribution, gratuity, and other components are inevitable. The most immediate effect is the fall in take-home or in-hand salary. But, employers’ contribution to Provident Fund is bound to increase. 

Fall In Allowances And Variables

According to new rules, the basic salary cannot be less than 50 percent of the CTC. Currently, this ranges anywhere from 30 to 40 percent of the gross salary. The rest is covered by allowances like HRA, Telephone charges, Newspapers, etc. Now, since the Basic Salary is increasing, the allowances will go down. 

For example, if a person has a salary of Rs 1 lakh per month, the earlier Basic Salary was Rs 30,000-40,000 and the rest were the allowances. Now basic salary will be at least Rs 50,000 and allowances will have to come down in order to not exceed the 50 percent limit.

Rise In Provident Fund, Fall In Take Home Salary

The PF is calculated as a percentage of the basic salary. Now with the rise in Basic Salary, the PF will also go up. This will secure the future of the employees but out of the total, more PF will be deducted. This might impact the take-home salary in a negative way.

The TDS calculations will also be impacted due to changes in the salary slip structure.

Increase In Taxes

The allowances, apart from Basic Salary, Bonus, and some part of HRA, are non-taxable under the current rules. With the rise in the Basic Salary (the taxable part) the taxes are also bound to go up. The non-taxable part will shrink significantly with the new changes. It will range from 20-25 percent, from earlier 50 or more percent.

Under the new rules, the tax on HRA is also expected to rise significantly. Due to the rise in Basic Salary, HRA will also rise. This will increase the taxable part of HRA.

This change will, however, impact people with high income more. People will low income will not see a significant rise in their taxable income