Draft rules for Code on Wages: Govt seeks stakeholder views on defining ‘basic pay’, ‘allowances’

The Labour Ministry has asked some companies to formally communicate the issue in response to the draft rules which were put out earlier for public feedback.

In the Code on Wages, the government has come out with a new definition of wages, putting a cap on allowances at 50 per cent of total compensation, implying basic pay will have to be 50 per cent or more.

The government may consider tweaking the definition of basic pay and allowances in the draft rules for Code on Wages, taking into account the concerns raised by industry and employers that the new definition is likely to result in lower take-home salaries for employees.

The Labour Ministry has asked some companies to formally communicate the issue in response to the draft rules which were put out earlier for public feedback. “Some companies have approached the ministry on this matter. We have asked them to formally respond to the draft rules. So during the rulemaking itself, we’ll take the concerns into consideration because the rules are yet to be finalised,” a senior Labour Ministry official told The Indian Express.

In the Code on Wages, the government has come out with a new definition of wages, putting a cap on allowances at 50 per cent of total compensation, implying basic pay will have to be 50 per cent or more. Usually, companies structure salaries with a higher proportion of allowances than basic pay.

The new definition of wages is expected to result in higher gratuity and provident fund (PF) deductions as they are linked to the level of basic pay, which in turn, is expected to result in lower take-home salaries.

However, officials said that since PF contribution is mandatory only till Rs 15,000 salary level, the PF contribution above that threshold will not be impacted by the new definition of wages.

“Above Rs 15,000 is voluntary, we have mandated till Rs 15,000 only. It is up to the companies and employees to change the percentage of provident fund contribution. Not against the law if the employer doesn’t deposit beyond Rs 15,000. So, the new definition of wages will be an issue only for the gratuity component,” said a government official.

At present, employer and employee can make voluntary PF contributions on actual wages in case the monthly salary of the employee is over Rs 15,000 and their PF contribution can be capped at 12 per cent of Rs 15,000, which is mandated by the government.

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The official said that whatever change happens, will be prospective. “It won’t affect previous salaries. Once we do it for next year, employers will automatically adjust their salary structure accordingly. Then the companies will adjust their compensation structure accordingly taking into account higher gratuity. But, we’ll be taking note of their concerns,” the official added. The government had floated draft rules for Code on Wages in July. The four new labour codes are likely to come into effect from April 1.

Aanchal Magazine

Aanchal Magazine is a Senior Assistant Editor with The Indian Express, serving as a leading voice on the macroeconomy and fiscal policy. With over 13 years of newsroom experience, she is recognized for her ability to decode complex economic data and government policy for a wider audience. Expertise & Focus Areas: Magazine’s reporting is rooted in "fiscal arithmetic" and economic science. Her work provides critical insights into the financial health of the nation, focusing on: Macroeconomic Policy: Detailed tracking of GDP growth, inflation trends, and central bank policy actions. Fiscal Metrics: Analysis of taxation, revenue collection, and government spending. Labour & Society: Reporting on labour trends and the intersection of economic policy with employment. Her expertise lies in interpreting high-frequency economic indicators to explain the broader trajectory of the Indian economy. Personal Interests: Beyond the world of finance and statistics, Aanchal maintains a deep personal interest in the history of her homeland, Kashmir. In her spare time, she reads extensively about the region's culture and traditions and works to map the complex journeys of displacement associated with it. Find all stories by Aanchal Magazine here ... Read More