India Inc. is using a wider menu of benefits and allowances to shield employees’ take-home salaries from the impact of the new labour code, even as companies hand out muted salary hikes amid a sluggish jobs market.
This has resulted in a larger pool of employees selecting benefits this fiscal year, such as uniform allowance, professional development, car lease, driver’s salary, internet and communication allowance, children’s education and hostel allowance, and meal cards, among others.
“The current provisions on Code of Wages are mostly impacting salary structure design and companies are ensuring the right balance between compliance, cost management, and protection of employees’ take-home pay,” said Amit Otwani, associate partner, Talent Solutions in India, at consulting firm Aon.
“Most companies are ensuring that there are minimal changes to the basic pay structure, and most of the changes are getting reflected in other allowances, thereby creating an approach that has minimal impact on take-home pay,” said Otwani, who advises large multinational organisations on reward and talent strategies.
The labour-code impact
Under India’s new labour codes, wages must account for at least 50% of remuneration, increasing gratuity and other statutory payouts, such as provident fund contributions. Companies have reworked the costs of gratuity and leave encashment due to the broader definition that came into force last November. Employees may even see a slight reduction in take-home pay if the overall cost-to-company remains unchanged.
Of India’s top 30 companies, 25 that reported the impact of the amended labour regime suffered a nearly ₹12,000-crore blow to their December-quarter profits, a showed. They included Tata Consultancy Services, Infosys, HCL Technologies, Maruti Suzuki India Ltd, Sun Pharma, Axis Bank, HDFC Bank, and InterGlobe Aviation.
The new income-tax structure, which offers a higher set of allowances, is also helpful.
Tax-efficient perks
“Companies are therefore designing more tax-efficient salary structures based on the latest tax rules and absorbing any additional costs, in some cases, to ensure employees’ take-home pay does not reduce,” said Alok Agrawal, partner at Deloitte India.
Agrawal outlined some of the more popular benefits that companies are rolling out for a larger group of workers. One is the meal voucher. The tax-exempt limit for the meal voucher benefit has increased from ₹50 per meal to ₹200 per meal. This benefit is now available under the new tax regime as well.
Then there are fuel and driver reimbursements. “Employers are offering reimbursements for fuel and driver expenses for employee-owned cars used for both personal and official purposes. Updated tax rules reduce the taxable portion of these benefits. The tax benefit is available under both the old tax regime and the new tax regime.”
He noted that companies are also considering children’s education and children’s hostel allowances in their pool of benefits.
Talent retention
The changes come at a time when India Inc. had to roll out increments hovering around the 9% range amid concerns over geopolitical tensions, rising fuel prices, inflationary pressures, and constrained demand and supply across sectors.
Muted outlook, along with the advent of artificial intelligence (AI) taking over many roles, has led to shrinking increment budgets.
But sluggish job market conditions aside, firms need to retain talent, and this is where the expanded range of allowances can serve as a hook.
Jude Vijay, senior director, Work and Rewards, India, at advisory firm WTW, explained that allowances differ depending on the industry. Sector-specific allowances, such as uniform allowances, are more prevalent in the manufacturing sector, while allowances such as professional development, internet, and communication are more prevalent in the services sector, in line with the requirements of jobs in these sectors.
“In the current situation, companies are evaluating allowances from the perspectives of labour code compliance and tax-exemption possibilities to strike the correct balance and ensure no major impact on take-home salaries.”
Variable-pay shift
Law firms working with companies on employment contracts note that companies are considering increasing the variable-pay component and annual performance incentives.
“Annual performance incentives are being positioned as a key balancing lever to offset any perceived reduction in monthly take-home pay under the new wage framework. Additionally, companies are also re-examining the frequency of variable-pay disbursements, with many moving away from traditional annual payouts towards quarterly or semi-annual cycles,” said Sonakshi Das, partner at JSA Advocates & Solicitors and part of the Labour and Employment Practice.
This shift is intended to improve cash-flow predictability for employees by ensuring more regular income inflows throughout the year, Das added.
The law firm said labour and employment ministry has clarified that annual performance-linked incentives and commissions are expressly excluded from “wages” and, consequently, do not serve as a base for statutory contributions such as provident fund or gratuity.