Salary Structure Dilemma: Can I Adjust Special Allowance Without Changing Basic Salary?

Hi, please resolve my query. I am proposing to freeze the Basic Salary up to Rs 21,000 per month. Now considering this, please guide me on the following:

1) In case of an increment, can I make an addition only to the Special Allowance component without increasing the Basic Salary part? The reason for doing so is to keep the gratuity payout component permanent.

2) Is this legally possible?

3) Also, I would like to fix the PF contribution at Rs 15,000 per month.

4) Currently, the Basic Salary (without the new wage code) is 45% of the CTC. So, can I tweak the same and issue new appointment letters to everyone?

Please advise; it will be of great help.

Answer to your question no. 1 is yes. However, PF contribution will also be based on the Special Allowance. It is very difficult to determine if the Gratuity payout will be restricted to a fixed amount since PF gross (Basic + other allowances) will change, resulting in potential changes to Gratuity.

Answer to your question no. 2 is uncertain at this stage regarding future interpretations. Additionally, after the implementation of new labor codes, the existing ambiguities will be eliminated.

Answer to your question no. 3 - it is well accepted in law.

Answer to question no. 4 - Acceptable for now. However, potential issues may arise when the new labor codes are implemented.

Dear Mr. Bandyopadhyay, the new labor code is just a few days away. However, the new wage code is silent on the treatment of gratuity, specifically with regards to Basic. If I am wrong, please guide me to the appropriate section. If the entire 50% of CTC is to be taken for gratuity calculation, that is a significant hit to companies from an individual employee perspective.

Regards, Anu

Dear Anu,

Gratuity matters are not under the Wage Code but under the Code on Social Security. There is no change in the calculation method of Gratuity. The Wage Code will determine the wage (Basic & DA) for the calculation of Gratuity.

The reality in the system is different. To date, a good number of organizations, including those in organized sectors, maintain Basic as 30 to 35% of the monthly gross. Moreover, some organizations pay more in yearly items instead of monthly gross to keep the Basic low. The purpose of lawmakers is absolutely clear: not to deprive employees irrespective of their level. That is why the definition of wage has been framed very scientifically.

Basic should be Annual CTC less ESIC & Insurance premium if any (not payable to the employee directly or indirectly) and 50% of the amount. If it is the law of the land, whether we like it or not, we will be required to fix Basic accordingly, and there will be an impact on Gratuity payment.

It will be a big project for all organizations to identify skill differentiation of the employees, check the minimum wage level, and find out the total remuneration payable to the employee and accordingly determine Basic.

Thanks & regards

Annual Increment and Basic Wages

The annual increment is applied to the Basic Salary, not on account of the Special Allowance. If it is done so, it shall be treated as a component of basic wages. The reason you offered regarding gratuity will not be valid because an increment is considered to match inflation.

PF Contribution and Slab Changes

The PF contribution cannot be fixed at Rs 15,000 per month because the slab changes from time to time. If you do so, it would create difficulties in accounts for making provisions.

New Code on Wages

The new Code on Wages is applicable to employees taken on employment from the date it comes into effect.