New Wage Code 2021- How are businesses going to be affected?

As per the Central government's new wage code, employees' allowances should not exceed 50 per cent of the CTC.


The new definition of wages in India under the New Wage Code 2021 could impact the cash payments that employees take home. The new labour regulations, including the revised wage definition, are expected to come into force on April 1, 2021.

New Wage Code 2021: What is the new definition of wages? Why was it necessary?

The central issue is the new definition of wages issued by the Indian government. It includes all bonuses, be it salaries, allowances, HRA contributions, pension fund (PF), etc., but these may not exceed 50% of the employee’s basic salary. This means that even if companies don’t redefine the compensation framework, they have no choice but to revisit their company remuneration policies again. A large part of the salary is technically defined as the base salary, and the rest is excluded.

According to the new wage law, the allowances that are privy to an employee should not exceed 50% of the cost to the company (CTC). This means that the base salary of each employee must be at least 50% of the CTC. After the new rules come into force, employers who do not pay employees 50% of their CTC as a base salary will have to change their policies. 

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The central government will soon announce new rules under the new labour law that will directly affect workers' wage structure in the country.

How will the New Wage Code 2021 affect businesses?

Indian companies hope the government can postpone implementing new labour laws or at least clarify them before April 1st. Otherwise, employees’ salaries that have to be transferred at the start of the new fiscal year will be significantly reduced.

Corporations are still facing the adverse effects of COVID-19, and the pandemic is not over yet. NASSCOM expects the rule to go into effect in May or June, depending on government-industry interaction. In general, labour laws are very much needed. But, as is the case with any new law, these are the initial stages and involve a lot of uncertainty.

Under the cost to company (CTC) model, companies are likely to increase the share of the salary that goes towards employees’ PF. And, it will be at the expense of other allowances leading to lower take-home salary.

Long-term benefits are uncertain

In a slightly positive outlook for the new definition of wages, long-term benefits like post-retirement payments and leave encashment can increase, mainly when applied retrospectively. This means good news for employees but more responsibility for companies.  Companies will have to take on more responsibility in collecting the payments and contributing towards the extra funds for employee benefits.

However, the government has not clarified how the change in definition applies to these long-term benefits. The central government will soon announce new rules under the new labour law that will directly affect workers’ wage structure in the country. It will affect the employees’ cost-to-company (CTC) and the employers’ wage bills.

Aakash Sharma
Aakash Sharma
Aakash writes on Startup Ecosystem, Policies, Legal and Regulatory aspects of business planning. An alumnus of Delhi University, he is assistant editor at Dutch Uncles.

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