Retirement Corpus To Get Bigger As New Labour Rules Push Up Worker Contributions

Retirement Benefits Under New Labour Codes: One of the major changes in new labour codes is the unified definition of ‘Wages’, shifting how statutory wages are calculated in India. Under the new framework, the definition of ‘wages’ has been unified to include basic pay, dearness allowance, and retaining allowance as core components. The other components of CTC such as House Rent Allowances, conveyance allowance, overtime, bonuses, and employer contributions to the provident fund, cannot exceed 50 per cent of an employee’s total CTC.

PF Contribution To Increase

This effectively ensures that the base for computing social security benefits, particularly Provident Fund and gratuity, must constitute at least 50% of the CTC, Balasubramanian A, Senior Vice President, TeamLease

Services said. “This is a significant departure from earlier practices where many organisations structured compensation with basic salary comprising only 30-40% of the gross wage, keeping statutory contributions lower,” Balasubramanian A added.

Suchita Dutta, Executive Director of Indian Staffing Federation (ISF) also underlined that this provision ensures the gratuity calculation base is substantially larger, potentially increasing lump-sum gratuity payouts by 20-30% for many professionals, leading to an increase in retirement security.

Impact On Gratuity

Employees may see a substantial increase in gratuity sum under the new labour codes due to changes.

Balasubramanian A argued that with the statutory wage floor set at 50% of CTC, the contribution base for PF, ESI, and gratuity has substantially expanded. “While this does increase the immediate compliance cost for employers and may result in lower take-home pay for employees in the short term, it significantly strengthens long-term financial security and retirement benefits for India’s workforce,” he added.

Gratuity is a sum of money paid by an employer to an employee upon leaving the organization, after completing a minimum service period, typically five years.

The new labour codes has decreased the minimum service requirement for gratuity eligibility for fixed-term employees from five years to one year. However, it has remained five years for permanent staff.

Calculating Gratuity

The formula for calculating gratuity is based on the employee’s last drawn basic salary:

Last drawn monthly wage x 15 / 26 x no. of years

This translates to 15 days’ wages for every completed year of service, as mandated by the Act.

For instance, if an employee’s annual basic salary is Rs 100, the monthly basic salary would be Rs 8.33 (Rs 100/12). The gratuity per year of service would then be 4.81 (8.33 x 15/26).

In your offer letter, gratuity is typically represented as 4.81% of your annual basic salary. This percentage is derived from the gratuity calculation formula.

Social Security Net Expands

The Code on Social Security also includes gig workers, platform workers and unorganized workers. It means they will also get PF-like benefits, ESI-like protection and life and disability cover.

The new system finally recognises today’s reality, Taru Shikha, Founder & CEO HiredNext Avron said, adding people switch jobs more often, many work on fixed contracts, and gig work is now a large part of the economy.

Kartik Narayan, CEO- Jobs Marketplace, Apna said that it will lift social security contributions for many employees, make take home pay more predictable and nudge employers toward more transparent compensation design.