India: A Government-Mandated Wage Code Restructuring Could Boost Retirement Income

Standardizing how wages are calculated for those earning less than Rs 15,000 monthly could impact paycheck payout amounts due to newly amended legislation set to take effect on April 1, 2021. Currently, companies with 20 or more employees deduct 12% of basic wages plus an interest allowance for workers earning less than Rs 15,000 monthly for their contribution portion to the Employees’ Provident Fund (EPF). Employees then pay in an additional amount, equivalent to 12%. Combined, these funds accumulate to provide a lump-sum benefit, with interest, at retirement. Workers making less than Rs 15,000 monthly are mandated to participate in the EPF retirement benefit plan. Contractors, gig workers and freelancers are included among the proposed beneficiaries. This may be significant, considering that roughly 90% of gig workers may be earning below that threshold following the pandemic.

The update stems from recent labor code changes to standardize what comprises wages and, therefore, the amount of contributed funds from employers and workers. According to the update, called the new Code of Wages, wages will now be determined based on a set of inclusions (basic pay plus interest allowance) minus some exclusions (e.g., housing allowances, overtime, bonuses, etc.). If those exclusions equal more than half the total salary, the amount over 50% must now be included as wages, upon which the EPF amount is calculated.

Takeaway: Because the changes could provide increased contributions and savings for certain low-earning workers’ retirement funds, employers should prepare now for the possibility that their proportionate payment into a worker’s EPF could increase. Further, the move is a sign of the government’s recognition that it needs to extend social welfare benefits to flexible workers, a group typically removed from such retirement schemes. Companies should follow updates and seek input from a workforce solutions expert like AGS to ensure they are compliant with all emerging changes and strategically advised on the financial, legal and operational impacts of the code.

India: A Government-Mandated Wage Code Restructuring Could Boost Retirement Income

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