The in-hand component of salaries of employees may reduce starting next financial year as companies would be required to restructure pay packages after the government notifies draft rules under the new wage rule. The new compensation rules, which are part of the Code on Wages 2019, are likely to become effective from the next financial year starting in April. According to the new rules, the allowance component cannot exceed 50 per cent of the total salary or compensation and this basically implies that basic salary has to be 50 per cent.

To be in compliance with this rule, employers will have to increase the basic pay component of salaries, which will result in a proportional rise in gratuity payments and employees’ contribution to the provident fund (PF).

Retirement contributions would translate into lower take-home salary for employees but the retirement corpus of employees will grow.

Currently, most private companies prefer to set the non-allowance part of the total compensation less than 50 per cent and the allowance portion higher. However, this will change as soon as the new wage rules come to effect. The rules are expected to impact private sector employees’ salaries because they usually get higher allowances.

Employers will have to hike the basic pay of employees to meet the 50 per cent basic pay requirement, according to the new rules.

While the new wage rules may cut take-home salaries of employees, experts have said that the new measures would help to provide better social security and retirement benefits.