A new amendment as a part of the Code on Wages 2019 - the new compensation rules, is likely to come into effect from the next financial year which begins on April 1st 2021. According to the amendment, the allowance component cannot exceed 50% of the total salary or compensation and which eventually is half of the basic pay.
Accordingly, employers will be forced to increase the basic pay, resulting in a proportional rise in the employees' gratuity payments and their contribution to the provident fund (PF).
Not to worry on the retirement benefits even if the retirement contributions implies lower take-home salary for employees as the retirement corpus of employees will grow.
Even though most private organisations prefer to have a lower non-allowance percentage, this scenario is expected to change once the new wage rules come into effect. Eventually, the private sector employees might bore a hole in their pockets as they are the ones who enjoy higher allowances and benefits when compared with other sectors.
Apparently, the central government's proposed new rules will expect the employers to hike the basic pay of employees to meet the 50 per cent basic pay requirement. But experts opinion that this new change will help to provide better social security and retirement benefits even though there might be an unexpected slash in the take-home salaries.