New labour code may reduce take-home salary: Analysts

New Delhi: The new labour code, which came into effect from November 21, is likely to result in lower take-home pay for many employees as the requirement to ensure that the basic salary makes up at least 50% of the total cost-to-company (CTC) would prompt employers to restructure pay packages, analysts said.

“The take-home salary may reduce as the retirement benefits will increase along with wage as the code mandated that basic salary will be at least 50% of CTC,” SBI Research said in a note on Tuesday.

According to analysts, contributions towards retirement benefit schemes like gratuity and provident fund (PF) are likely to increase under the new laws. Normally, PF and gratuity are calculated as a certain percentage of basic salary. The increase in basic salary will lead to higher contributions to the retirement benefits, leading to reduction in take home pay if the CTC remains the same.

The Centre has notified four new labour codes replacing 29 labour-related Central laws, which were largely framed during the British colonial period. The new regulations push for formalisation of labour and enhanced social security.

As per the International Labour Organisation, India’s social-security coverage increased from 19% of the workforce in 2015 to 64.3% in 2025.

SBI Research said that the new regulations are likely to push the social security coverage of workers in India to 80-85% in the next two-three years.

“In India, approx 44 crore people work in the unorganised sector, out of whom, around 31 crore unorganised workers are registered under the e-shram portal. By assuming 20% will shift from informal payroll to formal payroll, it will benefit around 10 crore beneficiaries,” it said.

“Though the new codes will escalate the cost of operation for the employers, it will reduce compliance burden, substantially,” it added. The Industrial Relations Code, 2020, has reduced the number of rules to 51 from 105, forms to 18 from 37, and registers to zero from 3.

“For too long, land and labour, the two critical factors of productivity, have been shackled by archaic and burdensome regulations. This reform has liberated labour to a large extent,” said Rishi Agrawal, Co-founder & CEO, TeamLease RegTech.

“The reform eases the regulatory cholesterol by reducing recordkeeping requirements by as high as 70%. It also promises to reduce deeply entrenched criminality for procedural contraventions by as high as 80%,” Agrawal added.

The new regulations are likely to give a push to formalisation of labour. As per the Periodic Labour Force Survey data released by the Ministry of Statistics & Programme Implementation, the share of formal workers in India is estimated to be 60.4% of the total workforce.

“We estimate a 15.1% increase in the formalisation rate post the implementation of 4 labour codes pushing labour market formalisation to 75.5%,” SBI Research said.