EPF & New Labour Codes Explained: How Your Salary Stays Unchanged

Salaried workers in organized sectors have been rattling their heads and feeling anxious since the notification of the New Labor Codes last month. The topmost question? It was the government's decision to impose a harmonized definition of "wages".

The new regulation demands that fundamental salary elements, distributed into basic pay, dearness allowance (DA), and retaining allowance, must constitute at least half of the total salary package (CTC).

To many, this appeared alarming at first sight. The reason? Many predicted that if the basic pay rank went up, so would the PF contributions, thus slowly and steadily reducing the monthly net take-home pay of some workers.

What Caused This Change?

The government put this policy classification under Code 3 - The Code on Social Security, 2020, which was meant to unite all the different salary structures.

In the past, the majority of the companies paid a lower basic salary and it was the allowances that took up most of the salary. Consequently, the employee was benefitted less from PF, pension, and gratuity because of lower statutory payouts.

Under the new rules, if pay is accompanied by allowances more than 50% of the total salary, then the part above 50% must be transferred back to regular wages for the social security calculations. This is how the workers’ rights to proper calculation of social security benefits are safeguarded.

Union Labour Ministry Interferes to Explain the Confusion

The Ministry has said that the New Labor Codes do not mean that the monthly take-home amount will necessarily go down.

What was the main point? Whether PF is based on the statutory wage ceiling or actual wage.

The EPF rules now limit that monthly payment to Rs 15,000 with any additional contributions being voluntary.

Take-home Pay Example

Let’s say an employee gets Rs 60,000 every month:

• Basic + DA = Rs 20,000
• Allowances = Rs 40,000

Prior to New Labour Codes:

Statutory wages were only Rs 20,000.

PF was calculated on Rs 15,000.

• Employer PF (12%) = Rs 1,800
• Employee PF (12%) = Rs 1,800
• Take-home pay = Rs 56,400

After New Labour Codes:

Eventually, it would be considered as wages under the limit of 50%, so Rs 10,000 is added back to wages.

• Statutory wages = Rs 30,000

PF calculation continues to be on Rs 15,000 only unless both agree in writing to the full Rs 30,000.

Outcome:

• Employer PF = Rs 1,800
• Employee PF = Rs 1,800

Take-home pay is still Rs 56,400

✅ Main Point: While the new definition raises wages on paper, your monthly net amount does not drop as long as PF contributions are capped at Rs 15,000.

The Rs 15,000 EPF ceiling keeps the workers from being automatically deducted if the employer changes the salary structure in line with the new labor codes. Any payment over this is voluntary and not deducted from the retirement savings.

Labor unions have been demanding an increase in this limit, so that the workers will be entitled to better social security benefits. The last change was in 2014 when the limit was raised from Rs 6,500 to Rs 15,000. Since then it has remained the same, although wages and inflation have been rising.

The Bottom Line

Initially, the New Labor Codes raised the specter of salary reductions, but the government reassures the employees that, at least under the existing PF ceiling, their take-home pay will not change.

The only scenario under which your pay would be impacted is where:

The statutory PF ceiling goes up, or employees willingly put in more for retirement saving which results in a higher retirement fund.

So, the workers can relax, the harsh reality of cutbacks is more about red tape than real pay reductions.