New labour codes boost gratuity but trim take-home pay

BENGALURU: With many employees seeing a moderate dip in net take-home salaries in their latest payslips, companies are issuing explainers to help them understand the impact of the new labour codes.

The reduction is largely due to changes in salary composition. Employee provident fund (PF) contributions have increased, as they are now calculated as 12% of a higher basic salary component. At the same time, gratuity accruals have also risen because they are linked to this expanded wage base.

Vikram Shroff, partner, employment, labour and benefits at law firm AZB & Partners, said the labour codes mandate that at least 50% of total remuneration is treated as wages for statutory payments, regardless of the CTC (cost to company) breakup. This, he said, protects employees’ interests.

“In cases where basic salary was lower, some employers increased it to 50% to better align with the wages definition. As a result, some of the other components were reduced or revised, while provident fund contributions increased. These changes led to a reduction in net take home pay,” he said.

Employees are beginning to see this play out in their compensation. IT professional Deepak C, who received a salary increment effective April, said the gratuity component in his pay has doubled. He received a Rs 90,000 annual increase in CTC, but “Rs 40,000 is going into the gratuity,” up from Rs 20,000 earlier. “My hike is effectively Rs 50,000 which is split between the PF and other components,” he said, highlighting the reduced immediate gain in take-home pay.

In some cases, companies are going beyond statutory requirements to cushion the impact. German software firm SAP India, for instance, has extended the revised gratuity calculation retrospectively to cover employees’ entire tenure, rather than only from the date of implementation.

It has also allocated additional budget to provide a one-time, permanent uplift in total target compensation (TTC), absorbing the higher employer-side PF and gratuity costs within the overall CTC. Additionally, SAP has introduced an uncapped gratuity benefit, where payouts exceeding the statutory cap of Rs 20 lakh are calculated on basic salary, resulting in higher payouts.

SAP has described the “one-time uplift” as a compensatory increase to offset the reduction in monthly take-home pay due to the revised salary structure. As a larger portion of salaries is redirected toward PF and gratuity, the uplift is aimed at stabilising employees’ net pay. An email sent to SAP didn’t elicit a response till press time.

Puneet Gupta, partner at EY India, said that under the earlier regime, gratuity was calculated on basic salary plus dearness allowance. Under the new labour codes, however, gratuity is linked to the broader definition of “wages” under the Code on Social Security, 2020


“This shift is significant because the definition of wages expands inclusion of pay elements, subject to a 50% exclusion threshold. As a result, the base for gratuity calculation may increase,” he said, adding that gratuity at exit will be based on last drawn wages.

(With inputs from Supriya Roy)
Ready to Make a Smarter Property Decision? Build Your Legacy with TOI Homes.