Synopsis—While the intention of the Code on Social Security is to increase the retiral benefits of the employee, this could impact the take-home salary. Here is a closer look at the various aspects of the Code and how its implementation can impact the take-home pay of an employee.
The Code on Social Security 2020 (the Code) which integrates nine social security regulations, has received the Presidential assent and is awaiting notification of the effective date. The Acts relating to Provident Fund (PF), Employees’ State Insurance (ESI), Gratuity, maternity benefits, employee’s compensation, building and construction workers, etc., have been subsumed in this code.
The Code has financial implications for employers and is likely to impact the salary structure of employees and other policies and processes. This is because the Code includes:
- Change in the definitions of employer, employee, wages etc., resulting in broad-based applicability of the regulations;
- Provision of gratuity benefits to fixed-term employees on a pro-rata basis;
- Extension of social security coverage to unorganised sectors;
- Aggregators will be required to contribute towards social security fund for welfare of gig/platform workers.
The Code attempts to simplify the approach by ensuring uniform definitions and to a great extent, mirrors the definitions provided in the Code on Wages 2019. The definition of the term wages, which is uniform across the Code on Wages and Code on Social Security, impacts the quantum of PF contributions (both by the employer and employee), gratuity payouts, maternity benefits etc.
While the intention of the Code on Social Security is to increase the retiral benefits of the employee, this could impact the take-home salary. Here is a closer look at the various aspects of the Code and how its implementation can impact the take-home pay of an employee.
Wage definition as per Code on Social Security
The definition of ‘wages’ payable to an employee under the new social security code is derived from the Code on Wages, 2019. There are three components in the definition of wages: broad-based inclusion, specified exclusions, and benefits in kind.
To make it simple, all remuneration which can be expressed in monetary terms are considered as remuneration and specifically includes basic salary, dearness allowance, retaining allowance, special allowance and all the other remuneration which are expressed in money terms.
Exclusions specified can be further divided into two categories. The first includes the allowances which are subject to a limit of 50 per cent of the remuneration or total wages. This means that these exclusions cannot exceed 50 per cent of the total remuneration. Examples of these are statutory bonuses, variable pay, employer contribution to PF and pension, house rent and conveyance allowances, travel concessions, overtime allowance, commission payable etc. According to the Code on Social Security, if these exclusions exceed 50 per cent of the total remuneration, then such excess (i.e., amount exceeding 50 per cent of the remuneration) has to be considered as wages.
The second part of the exclusion refers to termination related payments such as gratuity, ex-gratia, retrenchment compensation or any other retirement benefit payable and these do not form a part of the wages. These components will not be taken into account to determine wages for the purpose of PF contributions etc.
Benefits in kind can be defined as benefits offered by an employer to his employee which are not expressed in money terms. Examples of these are rent-free accommodation, cab facility provided, free meals etc. As per the Code on Social Security, these components will be included to the extent of 15 per cent of total wages.
Impact of new wage definition on take-home pay
Here is a look at how the change in definitions may impact the quantum of contribution and take-home pay of employees:
|Components of Salary||Case Study A||Case Study B||Case Study C|
|i)Basic salary (40% of CTC)||3,20,000||10,00,000||20,00,000|
|ii)House Rent Allowance – 40% of Basic Salary||1,28,000||4,00,000||8,00,000|
|iii)Leave Travel Concessions||40,000||80,000||1,60,000|
|iv) Conveyance/ Fuel reimbursements (on paying bills)||19,200||1,20,000||1,20,000|
|v) Variable Pay||50,000||1,00,000||2,00,000|
|vi) Employer Contribution to PF||38,400||1,20,000||2,40,000|
|vii) Gratuity included in CTC||15,392||48,100||96,200|
|viii) Special allowance||1,89,008||6,31,900||13,83,800|
|ix) Total Cash components – Current (annual payment) (i+ii+iii+iv+v+viii)||7,46,208||23,31,900||46,63,800|
|x)Less Employee contribution to PF||38,400||1,20,000||2,40,000|
|xi)Take Home Pay||7,07,808||22,11,900||44,23,800|
|xii)Wages as per the Code (Proposed)||5,59,008||17,31,900||35,83,800|
|xiii)Contribution to PF (EE & ER) under the Code||1,34,162||4,15,656||8,60,112|
|xiv)Gratuity included in CTC||26,888||83,304||1,72,381|
|Decrease in take home (xiii+xiv-x-vii-vi)||68,858||2,10,860||4,56,293|
TDS deducted by an employer is not considered while calculating take home salary
EE- Employee, ER- Employer, Figures in Rs
In the above example, the decrease in take home salary is on account of increase in contribution to PF and gratuity and is arrived at by considering the difference in PF and Gratuity contributions under both the scenarios.
In the table above, currently to arrive at your take home pay, (i) + (ii) + (iii) + (iv) + (v) + (viii) is added. Out of which employer and employee PF contribution is calculated at 12% of basic salary. Your own PF contribution is deducted from your take home pay while employer’s contribution is part of your CTC. Similarly, gratuity is arrived at on the basis of last drawn basic salary and forms the part of your CTC.
Once the code becomes effective, CTC of an employee needs to be worked out again as PF contribution by both employer, employee and gratuity forming part of CTC will need to be calculated on the new wages definition which will include basic, special allowance, excluded allowance like HRA (if it exceeds 50% of the wages) and benefit in kind, if any.
As per the above example, the EPF contribution (by both employee and employer) will increase from Rs 76,800 (38,400 +38,400) to Rs 1,34,162, an increase of Rs 57,362. The quantum of gratuity as part of CTC will also increase from Rs 15,392 to Rs 26,888, an increase of Rs 11,496.
The Code attempts to ensure that social security benefits, i.e., gratuity, EPF will be calculated on at least 50 per cent of overall compensation. While the intention is to increase the retiral benefits, this could impact the take home salary as illustrated in the above examples.
If the contributions to PF are limited to the statutory wage ceiling which currently is Rs 15,000 a month, then the change in definition as per the Code may not have an impact on the PF contributions. There is no visibility on whether this limit will change in the future.
How gratuity will be impacted under new social security code
As mentioned above, gratuity payment is likely to increase under the new social security code. This can be seen in the table below:
POGA – Payment of Gratuity Act; Figure in RsWith reference to Case Study D, even though the gratuity payable as per the Code is Rs.25,84,471 the employer may restrict the payout to Rs 20,00,000 which is the notified limit for gratuity as per the POGA Act, so the actual increase will only be Rs. 6,42,163 instead of Rs. 11,42,163 as shown above.
The Code also provides for gratuity benefits to fixed-term employees on a pro-rata basis irrespective of the service period. We have to wait and watch how the industry incorporates this in practice as to whether the CTC will increase or whether the gratuity payment be absorbed in the current CTC.
As per the existing maternity benefits provisions, wages include all cash payouts. Given that under the Code, certain exclusions are permissible to arrive at wages, the actual pay during maternity leave may be lower. For example, if the salary has components such as incentive bonus and cash allowances such as house rent allowance, conveyance allowance, etc. these may not be paid as part of pay during maternity leave and hence may result in lower salary during maternity leave.
The Code has widened the social security coverage by including the unorganised sector, migrant workers, gig workers (means a person who performs work or participates in a work arrangement and earns from such activities outside of traditional employer-employee relationship) and platform workers (means a person who performs work in work arrangement outside of a traditional employer-employee relationship in which organisations or individuals use an online platform to access other organisations or individuals to solve specific problems or to provide specific services or any such other activities which may be notified by the Central Government, in exchange for payment), under the ambit of social security.
While the government would be contributing towards social security benefits, it is important to note that aggregators would be required to contribute to the social security fund between 1 per cent and 2 per cent of their turnover (excluding taxes), subject to a ceiling of 5 per cent of amounts payable by the aggregator to gig workers and platform workers.
Overall, the Code goes a long way in the simplification and rationalisation of regulations and is a positive move towards universalisation of social security coverage. However, it is important for employees who already come under the purview of EPF and gratuity to analyse the impact on their take-home pay and retiral payments on the basis of the components of their CTC.
(Saraswathi Kasturirangan is Partner with Deloitte India, Sumit Jain is a Manager and Ritika Balvalli is a Deputy Manager with Deloitte Haskins and Sells LLP)