Labour Codes: Capping of allowances at 50%

With the new rules coming into play, retirement benefits will improve, while the CTC and take-home salaries will reduce


According to the new wage code, basic pay should account for 50 per cent of employees’ cost-to-company or CTC. The allowances given to employees, such as house rent allowance (HRA), leave travel, conveyance/transportation and overtime, will account for the remaining 50 per cent of the CTC. If any of these go beyond 50 per cent of the CTC, the excess will be considered as remuneration and get added to the salary.

That means, employers will then restructure the CTC keeping in mind to cap all the allowances at 50 per cent.

The new definition of ‘wages’ consists of three components — basic pay, dearness allowance and retention payment. Conveyance allowance, HRA, gratuity, statutory bonus, pension, PF contribution and overtime have been excluded from the definition.

Gratuity will now be calculated on the basis of a larger base, including basic pay as well as other allowances of wages, such as travel and special allowance. Therefore, companies will incur higher gratuity cost as they will increase contribution towards provident fund (PF) and gratuity.

The new rules and labour codes are likely to be finalised by the Ministry of Labour and Employment, so that they can be implemented with effect from the coming fiscal year.

In addition, there is a proposal to implement a four-day workweek and fix an overtime limit. While the employees cannot be made to work more than 48 hours a week, employers can increase the work day up to 12 hours so that the workers get 4 days off in a week.


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