The Code of Wages, 2019 got approval from the President of India on 8th August 2019
One section of it talks about capping the allowances at a maximum of 50% of total compensation or salary. What would that mean to you as a private sector employee? How would it affect your savings and investments for the future?
I have explained in detail some of the possible effects of the wage revision in this article.
If you are a private sector employee, you’d be habituated to the luxurious facilities as a part of allowances provided by your employer. Post applicability of the Code, you might have to slash those habits.
The Code talks about putting a cap on the allowances that an employer can provide.
Before that, if you don’t understand what an allowance is, here it is for you in simple words.
Allowance in the context of employment is – a regular sum of money paid by an employer to his employee for assistance in his job or for his lifestyle.
Some examples could be – travel allowance, house rent allowance, food allowance or entertainment allowance.
These allowances are provided to an employee in the form of coupons/ discounts/ reimbursements or as cash.
Private employers have always believed in the concept of providing their staff with better allowances. This helps them lure their human resource to stick around for a longer period.
The new compensation rules mandate an employer to cap allowances at 50% of the total salary.
Basic salary will be increased in proportion to the cut down of allowances.
You would think, how would it make a difference? Will your salary still remain the same?
Um, yes salary will remain the same, but your take-home salary will reduce.
How is that?
As the basic salary increases, the percentage of money transferred to gratuity and PF (which are calculated on the basis of basic salary) will increase.
Gratuity and PF get accumulated in a separate bank account and will be paid to the employee only after retirement/disability or after 5 years of service.
Resulting in a lower take away salary. The in-hand salary of each month will be less.
Less in-hand salary means, lesser savings and lesser scope for investments in various avenues like the stock market/ gold/mutual funds.
So, who gets the advantage of the new code? All private-sector employees.
Increase in gratuity and PF means, increased retirement corpus.
Those who have no plans of retirement funds are taken care of by the new code.
But for those who understand and invest in the stock market, it is a partial disadvantage.
Return on investment in various other avenues is higher than just parking money in Provident Fund.
But, less than 2% of the population in India invests in the stock market and understands other revenue-generating vehicles.
Thus, this is a logical move from the government to promote better pay-outs during retirement and promote financial security during their old age.