First, we have to understand the concept of wages.
The share of the produce paid to labour for its production activity under the contract of employment, either express or implied is called ' wages '. It was in kind only in the barter economy. When money has become the medium of exchange, the concept of wages changed into (1) Nominal Wage or Money Wages and (2) Real Wage. While the first one refers to the total amount of money paid to the labour in the process of production, the second one i.e., real wage means translation of money wages into real terms or in terms of commodities and services that money can buy. It follows, therefore, that though money wages remain the same, real wages are reduced by the hike in the prices of commodities and services. The inevitable conclusion thus becomes is that real wages also includes extra supplementary benefits along with the money wages. Hence the bifurcation.
Base or primary wages refers to the basic pay which is fixed in the wage/salary structure. Supplementary compensation in the structure refers to fringe benefits such as housing, medical aid, paid leave, retirement benefits etc., paid in addition to basic wages. Normally, the fringe benefits which have to be paid periodically along with basic wages to keep the money wages on par with real wages is called allowances. Of these allowances, those allowances viz., dearness allowance, retention allowance are taken into account along with basic wages for the purpose of computation of fringe benefits like bonus, gratuity, contributions to social security measures. In the absence of bifurcation, the entire gross wages should be taken into account for the calculation of fringe benefits which are the indirect financial commitments of the employer. That's the reasoning for bifurcation of the wage/salary into basic and other allowances. There is no statutory compulsion for bifurcation of wages for wages is to be taken as a single package only as a mutual consideration under the contract of employment. However, to curb the tendency of tactful avoidance of indirect commitments by some employers by means of bifurcation of the wage structure, the Code on Wages,2019 has redefined the term wages u/s 2(y) which you should go through in order to find out the answer for your last query.
From India, Salem
Community Support and Knowledge-base on business, career and organisational prospects and issues - Register and Log In to CiteHR and post your query, download formats and be part of a fostered community of professionals.