Salary Definition and New Wage Rule: How Salary and CTC will be impacted in 2021

Hello, Jagruk employees and employers.  HR professionals and employees often ask us How to divide our CTC into various  components like Basic and Allowances? or Are the various components  in my salary slip correctly?

HRs ask me how much should the basic be? 50%? 30%? 70%? Which allowances are mandatory?  Is giving HRA mandatory? How much should be given  in various allowances?

Today we will try to  answer all your questions

and teach you how to derive a  wage structure for a particular CTC and how to check whether your employer  has made a correct wage structure.

As you are aware, 4 new Labour codes  are soon coming into effect or might already have, by the time you watch this video.

So all companies will have to review &  revise their employee wage structures and will have to implement the new  definition of wage in their companies.

This will affect all employees  and employers in the country so it is important for you to  understand this new definition of wage.

Firstly, what is the confusion around salary?  Why are there so many allowances? There are 2 culprits – 1st is our  Labour Law and 2nd is Income Tax. So why Labour Laws? There are  plenty of labour laws in our country.

Now, they are all gradually being  merged into 4 Labour Codes. But all these different labour laws  have different definitions of wage.

For example, PF has this definition, ESI has this definition, Minimum Wages has this definition. Gratuity, Bonus, Payment of wages-  Wage is defined differently everywhere.

Since there are so many different  definitions, the confusion is justified. The definitions are different but employers  & employees further increase confusion. Why?

Because employers want to minimize expenses  and give lesser PF, ESI, Bonus and Gratuity. So they structure the allowances and  wages in ways that minimize their costs and not just employers, even employees  want PF & ESI deductions to be minimum. So that their In-hand  salary can be maximized.

Together, they overload the salary slip  and wage structure with allowances. Income Tax is another culprit because  of so many exemptions and deductions. To claim these, an employee has  to make use of particular hacks.

For example, one must add  HRA to claim HRA deduction. Children education allowance,  Hostel allowance TA and Medical allowance have  been replaced by Standard deduction but were components previously and  exist even now in many salary slips.

So you know why there is confusion. Now it’s time to end it. The new 4 labour codes  solve this issue by defining wages in a uniform way.  This definition is extremely important because this same definition applies to  all of PF, ESI, Bonus & Gratuity.

Wage will include all remuneration- Any money you receive from your employer  in any form will be considered as wage be it in the form of salary  or allowance or advance.

This includes Basic, DA, and Retaining allowance.

Do not confuse Retaining  Allowance with Retention allowance.

Only a few seasonal industries provide  Retaining Allowance in rare cases.

This and everything else is included  except for a few mentioned exclusions such as a statutory bonus which is  provided in accordance with the law.

Next, the value of house accommodation &  The employer’s share of PF is excluded. Any special expenses such as washing allowance is also excluded.

Washing allowance can be paid to  employees to keep uniforms washed or if your employees are working in  an underground mine or at a high altitude then any expenses you provide in that  regard are considered as special expenses.

Apart from this, House Rent Allowance, any payment made to an employee under a court ruling

Over time, any sales commission/incentive Gratuity and lastly, any retrenchment compensation is given on termination, Encashment of leaves or Ex Gratia payment received while quitting the job All these are excluded while Basic, DA, Retaining Allowance are included along with Special allowance and Traveling allowance.

Anything else you can think of will be counted as wage if you can’t prove it under the category “Defray Special Expenses”

Except for this entire list from A to K.

You might be tempted to keep  10% in basic & 90% in allowances since HRA, conveyance and  commission are all excluded.

You might want to keep a basic minimum to keep PF, ESI, Bonus, Gratuity low.

However, doing that won’t be possible. Most people won’t read the complete definition but the next paragraph is the deadliest.

It says that the sum of all  components from A to I should be less than 50% of the overall remuneration. Anything in excess of 50% will be added to the wage.

Assume your company pays you Rs.100 out of which, Rs.40 is the basic component and Rs.60 is HRA.

This however is not possible. Maximum HRA can be only Rs.50. So the remaining Rs.10 will get added to your basic. Your Basic and DA cannot be less than 50% of overall remuneration.

It can be 50/51/52 out of 100 but never 49/48/47 and so on. Let’s look at a detailed example. An employee ‘A’ has Basic- Rs.15000, DA- Rs.6000, HRA- Rs.6000, monthly  advance bonus is 7000/12=Rs.583, Conveyance allowance- Rs.2000, His PF contribution is Rs.2520 and he gets overtime of Rs.3000.

The total exclusions come to Rs.14103, while overall remuneration is Rs.35103. 50% of overall remuneration  comes to Rs.17551.5

We compare this with total exclusions. Here, 14103 is less than 17551, Therefore this wage structure is error-free and correct. It works. In a second example, employee ‘B’ has a high salary with Basic- Rs.50000,

HRA- Rs.25000, Conveyance and sales commission are Rs.3000 each PF is 0 while overtime is Rs.5000. In this example, you’ll see that the overall wage is Rs.86000, while the exclusions are Rs.36000 50% of overall wage is Rs.43000, and again, 36000 is less than that.

Hence, this case works too. Let’s look at the last example. Employee ‘C’ has a Basic of Rs.15000, DA is assumed 0 for simplicity.

HRA- Rs.10000,  Advance Bonus- Rs.500, Conveyance- Rs.2000,  Sales Commission- Rs.3000,

PF contribution- 12% of 15000= Rs.1800 which gets divided between EPS & EPF.

Overtime- Rs.3000. Here all exclusions amount to Rs. 20300, Overall Remuneration-Rs.35300 50% of this is Rs.17650.

Now 17650 is less than the sum of exclusions viz. Rs.20300 This is not allowed. Exclusions cannot be more than 50% of the total.

Thus, the difference of Rs.2650 will get added to the wage. You can leave out Rs.2650 from any one of the parts.

For example, I have removed it from the HRA and this Rs.2650 can be added to either the basic or the DA

This needs to be done for any month, where your excluded part becomes more than 50% of the overall.

Now let’s see to whom all this  The new wage rule is applicable. Whether it applies to blue-collar workers  only or to white-collar workers too?

Labour codes define an employee as any person employed on wages by an establishment to do skilled,  semi-skilled or unskilled, manual, operational, supervisory, managerial, administrative, technical or clerical work.

The same definition of wage will apply to all these employees. The wage structure for a company’s manager and clerk will be defined in accordance with the rules mentioned above.

If the salary is Rs. 2 lakhs, then minimum Basic & DA is Rs. 1 Lakh and if the salary is Rs. 10 lakhs, then minimum Basic and DA is Rs. 5 Lakhs.

The remaining 50% can  be adjusted in any way Do remember to keep a certain amount of cushion so that any commission/incentive given in any month does not

cause the exclusions to  exceed the 50% limit.

So try to restrict the other components to 35-40% so that you are left with a 10-15% cushion.

Now some important points. Firstly,  wage definition includes “All remuneration” Any component outside the defined exclusions are part of your wage, irrespective of whether you call it special allowance  or city compensation allowance.

One question that may arise now is “What about minimum wage?”

Can minimum wage be split between basic and HRA? As per the new definition, the answer is NO!

If the minimum wage is Rs.20000, then  Basic and DA must include Rs.20000. Anything over this can be  given as allowances, but this must be given to all employees as per minimum wage rules.

Earlier, in this particular case (2019), The SC had said that splitting minimum wage is allowed but the new labour codes cancel this.

They forbid splitting minimum wage between Basic, HRA, etc. Next, this same definition of wage  applies to PF, Gratuity, Bonus, ESI This means that PF and ESI will be deducted from Basic and DA. Earlier, ESI was calculated on  HRA too but not anymore.

The ceiling can be decided based  on different social security schemes PF limit is Rs.15000, ESI limit is Rs. 21000 But the definition of wage will  remain the same for all these.

Last and not so important point… If you pay your employee in kind For example, you give  them a scooter or a laptop Which is worth more than 15% of their wage, then the excess amounts over 15% will  get added to their wage.

Thanks for reading!

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