What components are to be taken while calculating the minimum wages in India & the percentages to be taken?

Hi, Kindly guide as to what components are to be taken into account while calculating the minimum wages in India and the percentages to be considered.

The components in our salary structure are:
Basic (50%)
Conveyance allowance (1600/-)
HRA (which is basic - conveyance)

I need to know:
a) whether only the basic is covered in the minimum wages calculation
b) if an additional 5% HRA should be considered

Kindly advise on an urgent basis.

Best Regards,
Ferozi

Hi,

All components of salary (before statutory deductions) form part of minimum wages.

If you are asking whether all these components will be considered as part of wages for legal compliance, then the answer would be yes. However, for all calculations, these allowances should be considered. It should not be that for compliance or to determine whether the company is paying the minimum wages or not, all the components will be taken into account. For determining payments such as bonus, PF, gratuity, leave encashment, etc., only the basic pay will be considered.

As per the present definition of wages under the Minimum Wages Act, it consists of Basic, DA, and HRA. In Maharashtra, there is a House Rent Allowance Act of 5% on Basic and DA that also needs to be paid. It is better to pay Basic and DA as per the declared Minimum Wages and 5% HRA on Basic and DA. Bonus, PF, and Gratuity will be calculated based on Basic and DA, while ESIC will be on the monthly gross, which includes Basic, DA, and HRA.

If the organization is interested in paying more than the Minimum Wages, it is always welcome.

S K Bandyopadhyay (WB, Howrah) CEO - USD HR Solutions +91 98310 81531 skb@usdhrs.in USD HR Solutions – To strive towards excellence with effort and integrity

Dear Ferozi,

Statutory minimum wages fixed by the Central Government and all State Governments under the Minimum Wages Act, 1948 generally comprise of two components, namely basic wages and variable dearness allowance. However, the actual industry practice may differ, such as consolidated wages or a componential structure including basic wages and other allowances, with or without dearness allowance. As far as I know, there is no rule specifying a percentage-wise apportionment of these components in the salary structure for any given wage period at present.

The scenario will certainly change when the Code on Wages, 2019 comes into effect, as the definition of wages under the Code mandates a constant proportionality ratio of 50:50 between the sum of basic, dearness allowance, and/or retaining allowance, and the sum of all other allowances specifically excluded in the definition under section 2(y). Therefore, the absence of dearness allowance as a separate component in the industry wage structure does not indicate non-compliance as long as the total of basic and other allowances falling within the inclusive part of the term 'wages' under section 2(h) of the MW Act, 1948, remains equal to the total statutory minimum wages. This principle is established in the judgment of the honorable Supreme Court of India in the Airfreight Corporation case [1999 LLR 1008].

It is important to note that this principle applies specifically to determining parity between gross minimum wages and gross industry wages. However, in light of Mr. Madhu's insightful observation in the previous response, it is worth considering whether an employer's argument based on this principle, when dearness allowance is not a distinct component in their employees' salary structure, would hold in a gratuity-related dispute.

Such an argument by the employer may be valid if the last drawn basic pay equals the sum of the last drawable basic and D.A. under the statutory minimum wages rate. In such a scenario, the employee cannot rightfully claim higher gratuity based on the exclusion of D.A. from the salary structure per the employment contract. Otherwise, the absence of D.A. as a distinct component could lower the gratuity calculation factor, resulting in a reduced statutory gratuity amount.

Therefore, it is advisable to maintain basic and dearness allowance components in line with statutory minimum wage rates, allowing adjustments against other allowances to manage the employer's indirect financial commitments.

Good discussions.

Ram K Navaratna

In one of the cases in my industry, sixty percent are allowances, and the remaining forty percent are Basic and DA. These total wages are much higher in comparison to minimum wages, but this Basic and DA are lesser than the minimum wages.

Please let me know whether this bifurcation is okay, or we need to adjust this. With this arrangement, with respect to PF, there is no issue keeping in view of the latest Supreme Court verdict. However, this affects gratuity. Hence, this question.

Regards, Ranjan Kumar Dixit

So long as you are keeping your total salary higher than the minimum wages, there is no issue with regard to the Minimum Wages Act. But if the gratuity qualifying salary falls short of it, you will have to calculate it according to the minimum wages. Even the payment of gratuity is not a regular payment but it takes place once or twice a year. At that time, work it on the statutory wages. However, what will go wrong is the provision for Gratuity Fund or investment of that fund in LIC. Therefore, at the time of actuarial valuation and payment towards LIC's gratuity fund, the wages of the employees may have to be worked out at the then minimum wages. Then the payment made by the LIC will tally with the amount payable to the employee.

One thing to note is that it is not merely the basic salary or the basic plus DA which will qualify for gratuity, but it should be the total salary as per the contract of service that should qualify for gratuity. This is my perception about the calculation of gratuity.