Navigating the New Wage Code: How Do Allowances Affect Basic and Gross Salary Calculations?

Understanding the New Wage Code

In the new wage code, it has been mentioned that the Basic Salary should be 50% of the gross salary less allowances.

Questions Regarding Allowances and Gross Salary

1) While calculating the Gross salary, is HRA considered an allowance to be deducted from the Gross Salary (considering that the HRA is 50% of Basic in the case of a Metro)?

2) Can Medical and Travel Allowances be deducted from the Gross Salary when calculating the Basic salary?

3) Should a performance-linked bonus be considered as part of the Gross salary? Furthermore, if the performance-linked bonus (if not considered part of the Gross salary) can be as high as 30% of CTC?

Clarification on Basic Salary Concept

4) Finally, what is the concept of Basic salary? Is it based on Gross Salary or CTC (which includes gratuity, Group Personal Accident Insurance policies, Performance-linked bonus, Employer PF contribution)?

Please clarify.

Understanding Basic Salary and Allowances

Usually, the basic salary or wage is notified for all classes of employment. Similarly, the DA or special allowances are also notified. In general, basic wages are considered as the basic wage plus the DA. As per the new code, excluding HRA, if any other allowances are given and exceed 50% of the basic wage, then they are required to be merged with the basic wage to calculate the revised basic wage. The concept of CTC has nothing to do with this. Other heads like bonus, gratuity, leave with wages, etc., are calculated based on applicability and entitlement towards employee fringe benefits.

Calculating CTC and Budgetary Expenses

For calculating CTC as a part of budgetary expenses, all heads need to be included to determine the cost incurred towards hiring an employee. Hope this helps.

Thanks for the response. Can you further clarify these queries? My questions are only specific to the wage code.

Basic Salary Requirement

Is it mandatory to have a basic salary of up to 50%?

Supreme Court Judgment on Allowances

Regarding the PF judgment of the Supreme Court stating that all other allowances, specifically the Special Allowance, will also be considered as basic, is that applicable here too? Does the sum of Basic Salary and Special Allowance equal the Basic Salary for the 50% threshold?

Performance-Linked Bonus

Is a performance-linked bonus part of the Gross Salary as per the new wage code?

Explanation on Wages Definition under Wage Code and Other Codes (Same Definition in All Codes)

There are three important steps in the definition of wages:

1. Wages mean all remuneration by way of salaries, allowances, or otherwise, and include Basic Pay, Dearness Allowance, and Retaining Allowance, if any.

2. Exclusion List

(i) Statutory Bonus (yearly component - part of CTC)

(ii) Value of any house accommodation or the supply of light, water, medical attendance, or other amenity or any service excluded from the computation of the wages.

(iii) Any contribution paid by the employer to any pension or provident fund.

(iv) Any conveyance allowance or the value of any travel concession (LTA, LTC, etc. - Yearly component part of CTC).

(v) Any sum paid to the employed person to defray special expenses incurred by the nature of his employment (may be incentives - production, profit sharing, etc.).

(vi) House Rent Allowance.

(vii) Remuneration payable under any award or settlement between the parties or an order of a court or tribunal.

(viii) Overtime.

(ix) Commission payable to the employee.

3. If the payment made by the employer to the employee as per the exclusion list exceeds 50% of all remuneration (CTC) calculated under this clause, the amount which exceeds 50% shall be deemed as remuneration and shall be accordingly added to wages.

As the exclusion list is exhaustive, if any employer is interested in paying to any other pocket other than the exclusion list (e.g., CCA, any kind of incentive, leave encashment, insurance, etc. as a part of CTC), it may or may not be considered as a part of the wages (not properly explained under wage code). Some of the above items may be covered under exclusion clause 2(v) above.

To Determine the Wage Structure for Any Employee, Consider the Following Examples:

Option 1

Monthly CTC: 20,000/-

Basic: 10,000/-

Employer PF: 1,200/-

Bonus: 833/- (Considering Minimum Wages is 10,000/- @ 8.33% level).

Therefore, the other allowances will be (10,000 - 1,200 - 833) = Rs. 7,967/- (Approx. 40% of 20,000/-).

Hence, the Monthly Gross salary will be (10,000 + 7,967) = 17,967/-

Therefore, as it appears that basic is becoming approximately 60% and other allowances are 40% at the monthly gross level. This percentage will again change (more Basic %) due to the effect of OT, LTA, higher % of Bonus, etc.

Option 2

Monthly CTC: 41,667/-

Basic: 20,833/-

Employer PF: 2,500/- (Paid 12% of entire Basic)

Bonus: 833/- (Considering Minimum Wages is 10,000/- @ 8.33% level).

Therefore, the other allowances will be (20,833 - 2,500 - 833) = Rs. 17,500/- (Approx. 42% of 41,667/-).

Hence, the Monthly Gross salary will be (20,833 + 17,500) = 38,333/-

The equation will again change if there is LTA or other payments.

Option 3

Monthly CTC: 41,667/-

Basic: 20,833/-

Employer PF: 1,800/- (PF Basic restricted to 15,000/-)

Bonus: 833/- (Considering Minimum Wages is 10,000/- @ 8.33% level).

Therefore, the other allowances will be (20,833 - 1,800 - 833) = Rs. 18,200/- (Approx. 43% of 41,667/-).

Hence, the Monthly Gross salary will be (20,833 + 18,200) = 39,033/-

In all cases, if we consider a higher percentage of bonus and overtime, it will be safe to make Basic 65% to 70% of the monthly gross salary and 35% to 30% as the other allowances within the exhaustive list of exclusion (HRA, Conv., etc.).

For argument's sake, if we consider Basic as 50% of Monthly Gross, then in a monthly gross of 20,000/-, Basic will be 10,000/- and other exclusion allowances will be 50%. Employer contribution to PF is also in the exclusion list, which is in this case 12% of 10,000/- = 1,200/- per month. If that is added back to other allowances as per proviso, the other allowances will be 11,200/-, which is more than 50% of monthly gross, not complying with the definition of wages.

Therefore, the calculation of the new remuneration structure should start from CTC, and CTC may be as per the guideline of the exclusion list provided in the definition of wages.

Regards, S K Bandyopadhyay (Howrah, WB)

Hello folks, don't be upset by false news; there is no clarification of CTC 50% in section 2(y) of the new wage code bill. Everyone has to consider 50% of the gross salary. HRA is not part of the salary, so you can adjust the allowance into the basic, which is going to affect a maximum of 2 to 5% for those whose salary is at a lower scale.

In my opinion, the confusion about the proportion between the included components and the excluded components of the wage structure, as per the definition of the Code, arises only because of the introduction of the hypothetical concept of CTC. CTC is nothing but the projected cost of employment per employee per annum from the employer's accounting perspective only.

Interpretation of 'Wages' Under the Code

The term 'wages' under the Code has to be interpreted only with reference to the wage periods and not beyond them. Therefore, only the components of the gross wages payable at the end of the wage period as agreed in the contract of employment have to be taken into account for purposes of segregation and comparison to determine the classified proportionality. If and only if such payments form part of the gross wages payable at the end of the wage period, they should be brought into the fold of wages; otherwise, they are remuneration in the form of fringe benefits, both statutory and contractual as well. Therefore, the comparison of proportionality and its adjustment for equation come into play only when the items enumerated from (a) to (i) in the exclusion clause are shown by the employer as parts of the gross wages payable under the contract of employment.

Influence of CTC on Interpretation

If I were correct, such an interpretation started because of the critical analysis of the Code by some experts with reference to CTC on some prominent websites.

Legal Implications of Ratio Decidendi

Coming to the legal implications of the ratio decidendi of the previous case laws relating to minimum wages, basic wages, etc., for the purpose of the MW Act, 1948, EPF Act, 1952, and the like, an objective analysis is required strictly with reference to the definition of the term wages under the new Codes as of obtaining now.

Understanding the Definition of Wages Under the Wage Code

In the definition of wages under the Wage Code, there are three parts. Part one mentions that wages mean all remuneration by way of salaries, allowances, or otherwise—without specifying monthly or yearly. In general interpretation, all remuneration means whatever is paid to the employee on a weekly, monthly, quarterly, semi-annual, or annual basis—not only monthly pay. It is also stated as "to be payable to a person." Therefore, it is not the concept of CTC, which has no legal status, and many organizations include the monetary value of different services within CTC, such as canteen subsidy, company cars provided, etc. It is essentially the payable amount to any employee as per the definition.

Exclusions in the Wage Code

Moving on to part two, there is a comprehensive list of exclusions (a) to (k) where both monthly and yearly components like bonus, LTA/LTC, etc., are mentioned. Employees, in terms of total remuneration, will receive all or some of those components from the exclusion list, which may vary from organization to organization. Even contributions to PF/PENSION Fund are also listed.

Proviso on Remuneration Calculation

In the third part, Proviso -1 states, "50% of all the remuneration calculated under this clause..." which does not refer solely to the monthly gross amount but also includes the amount paid as Basic, DA, and the amounts in the exclusion list that an employee will receive or that are payable to him/her as total remuneration.

Recommendations for Calculation

For the convenience of calculation and since the majority of Indian organizations manage employee costs under CTC, it would be advisable to deduct items from CTC that are not payable to the employee and are not included in all the remuneration under the clause—such as ESIC, insurance premium, subsidy costs (canteen, company car if any), gratuity, etc. Then, 50% of that deducted amount will be considered as wages (Basic & DA) as per the definition of wages under the Wage Code.

S K Bandyopadhyay (WB, Howrah)

CEO-USD HR Solutions

Understanding the Two Schools of Thought on Wages

There are two schools of thought. One is that wages (basic & DA) should be 50% of the monthly gross, and the other is that 50% of total remuneration, calculated under the definition of wages and payable to the employee, should consist of monthly, bi-monthly, quarterly, half-yearly, and yearly components. Let us take one example to understand the same.

Basic - 20,000/- per month, i.e., 2,40,000/- per year

HRA - 10,000/- per month, i.e., 1,20,000/- per year

Monthly gross - 30,000/- per month, i.e., 3,60,000/- per year

Furnishing Allowance - 3,00,000/- per year paid bi-monthly, i.e., 50,000/- per bi-monthly

LTA - 3,00,000/- per year paid quarterly, i.e., 75,000/- per quarter

Bonus - 2,00,000/- per year paid semi-annually, i.e., 1,00,000/- every 6 months

PF Contribution - 2,400/- per month, i.e., 28,800/- per year

Insurance premium - 20,000/- per year (Mediclaim, Group LIC, etc.)

Gratuity - 11,550/- (approx.) per year

It has been agreed by everybody that due to the implementation of the wage code, the employer's PF contribution and gratuity impact will increase.

Example Analysis

In the above example, the CTC of the employee is 12,20,350/- per year. According to the 1st school of thought, there is no issue for wages (basic & DA) which is 20,000/- per month and fulfills conditions 50% as in the total monthly gross there are two components only with HRA at 10,000/- per month. There will also be no impact on the employer's PF contribution and gratuity payment.

In the 2nd school of thought, wages i.e., Basic & DA should be 50% of total remuneration calculated under the definition of wages as per the Wage Code. The total remuneration is 12,20,350 - 20,000 - 11,550 = 11,88,800/- per year. Therefore, wages (basic & DA) per year = 11,88,800/2 = 5,94,400 i.e., 49,533/- per month instead of 20,000/- per month.

Conclusion

Lawmakers, knowing fully well that HR professionals will play intelligently and bypass laws to exploit employees, set the wages (basic and DA) at 25 to 40% of the monthly gross.

Therefore, from the above explanation as well as my earlier post, it may be concluded that the 2nd school of thought is trending towards correctness.

S K Bandyopadhyay (West Bengal, Howrah)

CEO - USD HR Solutions

Dear Bandyopadhyay Ji, just for the sake of more clarification, in the example you provided, considering the CTC as Rs. 12,20,350, you deducted Gratuity and Insurance Premium annually when following the 2nd school of thought. My question is, shouldn't we also deduct other excluded components such as HRA, Bonus, and PF, in addition to Gratuity and Insurance Premium? Shouldn't the Wages as per the new code, in this case, be 12,20,350 - 20,000 - 11,550 - 1,20,000 - 2,00,000 - 28,800 = 840000 / 2 = 4,20,000 per year, i.e., Rs. 35,000 per month? Please advise.

Regards, Rakesh Shinde

Dear Mr. Rakesh Sinde,

If we consider your proposal, then the Basic will be ₹4,20,000 per annum, and other allowances will be ₹11,88,800 - ₹4,20,000 = ₹7,68,800 per annum, not fulfilling the 50% condition.

Why Gratuity and Insurance Premium are Deducted from CTC

Now the question is, why have I deducted Gratuity and Insurance premium from CTC to calculate Basic? I request you to read the definition of "Wages" in detail.

In the first part, it is stated that "Wages means all remuneration... by way of salaries, allowances expressed in terms of money... be payable to a person... and includes - Basic Pay, DA & RA if any."

If we analyze the above, the key words are: all remunerations, by way of salaries, allowances, expressed in terms of money, and payable to a person. Therefore, in any CTC structure, there are items which are not payable to the employee, e.g., Insurance premium, Facility for Co's car, Canteen Subsidy, etc. Random items that vary from organization to organization are not considered part of wages. Only the payable portion expressed in terms of money is to be considered. As such, the Employer contribution to ESI is not part of the Wages definition as it is not payable to the employee.

In the second part, there is an exclusion list (a) to (k) wherein (j) gratuity is mentioned.

Understanding the 50% Rule in Wages Calculation

Now in part three - First proviso wherein it is mentioned that if payments made by the employer to the employee under sub-clauses (a) to (i) - (here (j)-gratuity is dropped) exceed 50% of all remuneration calculated under this clause, the amount which exceeds 50% shall be deemed as remuneration and shall be accordingly added in wages under the clause.

If we analyze the above, nowhere is it mentioned monthly gross or CTC, rather mentioned the all remuneration calculated under this clause which is nothing but the payable amount expressed in terms of money. I have also used the term CTC for easy understanding of the members.

Restructuring Remuneration Packages Post Labour Codes Implementation

Therefore, to restructure the existing remuneration package at the CTC level (random items that vary from organization to organization) after the implementation of Labour Codes - Every organization will be required to judiciously determine the payable portion of the CTC excluding Gratuity and then 50% of that will be Basic. The rest 50% will be the employer contribution to PF, Pension Fund if any (3-tier retirement benefit), Statutory Bonus if any, and all other monthly and annual pockets.

Even after doing all the above, there may be cases where the basic may be less than ₹15,000. In the case of PF contribution only and as per the verdict of the Apex Court in Feb 2019 - the PF contribution has to be made adding other monthly allowances, subject to a maximum of ₹15,000 per month.

But in the case of Gratuity, Bonus, etc., where Basic or Basic & DA are very important factors, only the Basic portion as per Wages calculation is to be considered.

Thanks & Regards,

S K Bandyopadhyay (Howrah, WB) CEO-USD HR Solutions [Phone Number Removed For Privacy-Reasons] [Email Removed For Privacy Reasons] USD HR Solutions – To Strive towards excellence with effort and integrity

First of all, it is not under Sec-36; rather, it is under Sec-26 (5) of the Wage Code. There are two things: Production/productivity linked bonus and production incentive.

Production/Productivity Linked Bonus

The first one is determined by an agreement or settlement between the employer and the employees.

Production Incentive

The second one is based on a production incentive scheme by Work & Motion study, and payment varies individually based on performance. In the first case, it is an overall agreement/settlement to pay a certain percentage of bonus if the organization achieves a certain level of production/productivity at the end of the year. This is adjusted against the total 20% of Bonus if the allocable surplus is sufficient to pay 20%.

It is not clear from the post whether it is a production incentive based on work and motion study paid quarterly to avoid ESIC payment or the first one. Many organizations have nomenclature production incentive as Production Bonus.

S K Bandyopadhyay (WB, Howrah) CEO-USD HR Solutions [Phone Number Removed For Privacy-Reasons] [Email Removed For Privacy Reasons] USD HR Solutions – To Strive towards excellence with effort and integrity