Latest News

Govt Wants Employers to Restructure Salaries to Incries Basic Wage

The centre is planning to reform labour laws to ensure employers do not keep basic income low in order to reduce contributions towards social security schemes.

The proposal to make basic income a major component of salary could lead to a decline in the take-home pay of workers as contributions towards provident fund, insurance and gratuity may rise alongside a higher tax outgo.

The government has proposed that salaries should be structured in such a way that allowances for house rent, leave travel and overtime, among others, are capped at 50 per cent of the basic pay. Whatever employers offer as salary beyond this will be treated as basic pay, on which the contribution towards provident fund, insurance and gratuity will be decided.

While some trade union leaders have welcomed the move, industry has opposed it fearing an increase in its wage bill.

The labour and employment ministry has prepared a detailed note on bringing uniformity in the definition of wages across 19 laws. The ministry has proposed two sets of definitions for wages: one for all laws that have financial implications for employers, including employees’ provident fund, employees’ state insurance and gratuity; and the second for other labour laws that are part of the proposed Code on Wages Bill 2017.

“The interpretations (of wages) used by employers, complainant employees and assessing authorities differs significantly, leading to a diversity in the stand taken by officers,” the note prepared by the labour ministry said. “Cases have been noticed where employers show basic wages plus dearness allowance as very low, say 10 to 30 per cent, and the remaining wage is shown as various allowances for performance, entertainment and conveyance,” the ministry observed.

Most employers pay 12 per cent of the basic wage as their share of the provident fund contribution and deduct from salary 12 per cent as the employee’ share. Higher basic pay could lead to more money flowing towards provident fund, insurance and gratuity contributions, adding to the wage bill of companies.

“This is an encouraging move. It will lead to social security because firms now suppress basic income to save cost,” said Virjesh Upadhyay, general secretary of the Bharatiya Mazdoor Sangh (BMS), who was a member of a committee set up by the government to rationalize the definition of wages.

According to the proposal, if the gross salary of an employee is, say, Rs. 20,000 per month, and the basic income is Rs. 8,000, then the allowance component cannot exceed Rs. 4,000. The remaining Rs. 8,000 will be included to calculate provident fund, gratuity and insurance contributions.

“Millennials and the younger workforce need more cash in hand. Most employers work on a total reward basis. If the proportion of the retirement fund contribution goes up, employers will reduce other components. The government needs to bring clarity in the definition of wages but there should be no over-reach,” said Shailesh Singh, director and chief people officer at Max Life Insurance.

Teamlease Services co-founder Rituparna Chakraborty said the objective behind salary restructuring in the private sector should be to increase the take-home pay. “By capping allowances, you are creating a large section of wages not accessible to employees. Organisations anyway do not have the flexibility to increase allowances as these are also taxable. Employers should have the freedom to decide their salary structures,” she added.

Labour law experts said the government’s move could be challenged in court. “I am not sure if it is feasible to talk about what will constitute fixed and variable pay. The definition of wage is not about the quantum, but the component,” said K R Shyam Sundar, professor, XLRI Jamshedpur.

The government will need to amend the Payment of Gratuity Act, 1952; the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952; and the Employees’ State Insurance Act, 1948, to bring about a change in the definition of wages applicable for determining social security benefits.



‘Wage’ for calculating social security benefits will be defined as a sum of:

• Basic wages           • Dearness allowance      • Retaining allowance

‘Allowances’ will include:

• Bonus

• House rent allowance

• Value of any house-accommodation

• Contribution towards pension or provident fund

• Travelling allowance

• Retrenchment compensation

• Overtime allowance

• Cash value of food



• Employers deflate the basic pay to keep the provident fund and other contributions low

• There are multiple interpretations of wages among employers, employees, inspectors and courts


• Take-home salary may take a hit

• Provident fund contribution and tax liability to go up


Source:Business Standard