Foreign businesses in India can have a challenging time comprehending and calculating the minimum wage as they differ in every state, and are categorized under multiple criteria, such as region, industry, skills level, and nature of work.
The new wage code prohibits employers from paying workers less than the stipulated minimum wage. Further, minimum wages must be revised and reviewed by the central and state government at an interval of not more than five years.
This article will address some frequently asked questions, including how minimum wages are calculated in India, what is the penalty for non-compliance, and what are some useful resources that hiring departments in foreign companies may refer to when assessing the country’s labor costs.
How is the minimum wage calculated in India?
India offers the most competitive labor costs in Asia, with the national-level minimum wage at around INR 176 (US$2.80) per day, which works out to INR 4,576 (US$62) per month.
This is a national floor-level wage – and will vary depending on geographical areas and other criteria.
More broadly, a global ranking of average wages recently prepared by Picodi.com showed that India had an average monthly wage of INR 32,800 (US$437).
Further, some state governments, like Andhra Pradesh, offer tax breaks for companies generating local employment.
It must be noted that India’s minimum wage and salary structure differs based on the following factors: state, area within the state based on development level (zone), industry, occupation, and skill-level. This offers foreign investors a range of options when choosing where to locate their set up.
India uses a complex method of setting minimum wages that defines nearly 2,000 different types of jobs for unskilled workers and over 400 categories of employment, with a minimum daily wage for each type of job. The monthly minimum wage calculation includes the variable dearness allowance (VDA) component, which accounts for inflationary trends, that is, the increase or decrease in the Consumer Price Index (CPI), and where applicable, the house rent allowance (HRA).
As mentioned earlier, the calculation of the minimum wage factors in the skill-level of the worker and the nature of their work. Broadly, workers in India are categorized as unskilled, semi-skilled, skilled, and highly skilled.
Updated minimum wage amounts
According to the Minimum Wages Act of 1948, both the central and state governments have control over fixing the minimum wages of employment. Wage rates of employment differ across occupations, skills, sectors, and regions. Given the extent of difference between various kind of employable work, there is no set wage rate that can be set for each specific work across the country.
In 2021, the updated minimum wage amount across various categories of employment, such as unskilled, semi-skilled, skilled, and highly skilled workers effectively commenced on:
- July 1 onwards for West Bengal
- April 1 onwards for Himachal Pradesh, Karnataka, Tamil Nadu, Chhattisgarh, Delhi, Jharkhand, Madhya Pradesh, Odisha, Uttarakhand, Andhra Pradesh, Bihar, Gujarat, and Uttar Pradesh
- October 1 onwards for Goa
- June 1 onwards for Assam, Kerala
- July 1 onwards for Haryana and Maharashtra
- November 1 onwards Jammu and Kashmir
- December 1 onwards for Manipur
Other states saw the most updated minimum wage commencing on:
- April 1, 2016 for Mizoram
- July 1, 2017 for Sikkim
- September 1, 2019 for Punjab
- June 14, 2019 for Nagaland
- October 1, 2020 for Meghalaya
- July 1, 2020 for Rajasthan
- April 1, 2020 for Chandigarh
- January 1, 2020 for Puducherry
Non-compliance of the minimum wage rules by employers will result in payment of a fine of INR 10,000 (US$136) and their possible imprisonment for up to five years.
Under the new wage code, the government will appoint inspectors-cum-facilitators to carry out inspections to ensure that the companies are compliant with the code. The penalty would depend on the nature of the offense. The maximum penalty is imprisonment for three months and/or a fine of up to INR 100,000 (US$1,405).
It is important that companies are compliant with the wage norms stipulated by the respective state government and industry body. Inspections are likely to be more stringent on companies with foreign investment, especially in the event of any labor unrest.
[tips title="Important Tip"]If workers are paid less than the government declared minimum wages, then they can file a complaint with the labor inspectorate. The complaint can be filed individually by the worker, or through a lawyer, or through an official of the registered trade union.[/tips]
Why India has no national minimum wage
Under the Code on Wages Act, 2019, workers from all industries are entitled to receive minimum wages fixed by their respective state governments. Matters concerning labor and its welfare come under the purview of, both, the state and central governments as per constitutional law, thereby resulting in multi-jurisdictional regulation.
Earlier, only workers from a particular set of industries (40 percent of the entire workers’ population) were entitled to receive minimum wages. Nevertheless, since passing the wage code in 2019, there has been no new development on implementing a national minimum wage for Indian workers.
In a media report, a government official was quoted saying that implementing the minimum wage plan was not a “priority right now as there are challenges at hand both at micro and macro levels.” The report further elaborated that the government worried that hiking minimum wages at this time would negatively impact industry amid an economic slowdown.
In January 2021, labor unions across the country observed a nationwide strike to protest the government’s stalling on proposals in this regard and its inaction on increasing workers’ minimum wages.
And, due to the ongoing COVID-19 pandemic, the implementation of a national minimum wage is not likely to get formalized any time soon. Moreover, labor shortages in industrial areas due to reverse migration during the 2020 lockdowns, have increased daily wage rates – at least for the near term. For example, daily wage rates have reportedly gone up from nearly INR 250 to INR 350-400 as of April 2021. It appears that workers have mobilized to metro cities than lower tier cities to recoup loss in wages during the economy shutdowns or recover from job losses. At the same time, India’s factory activity has increased on the backs of increased orders and rising consumption in sectors like the FMCG and logistics.
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Besides addressing wage standards in the country, key labor legislation have also been rolled out as promised by the central government in the pursuit of labor reforms. Three new labor codes were approved by India’s parliament on September 22-23, 2020, in a historic move to consolidate the country’s multiple labor legislation and compliance norms. The new codes are – Industrial Relations Code Bill, 2020; Code on Social Security Bill, 2020; and the Occupational Safety, Health and Working Conditions Code Bill, 2020.
As of April 12, 2021, the government has temporarily deferred the implementation of the four labor codes – till key industrial states notify rules of implementation. This was to previously come into effect April 1, 2021 and is likely delayed due to elections in some states (West Bengal, Kerala). Moreover, key stakeholders have raised concerns, including the corporate sector citing unpreparedness.
The respective labor codes will bring gig workers and inter-state migrant workers into the ambit of social security for the first time. This will impact minimum wage considerations, but businesses should note that they also make it easier for them to be flexible in their hiring and firing decisions as well as in shutting down operations in the country.
Seeking local expertise
Foreign entities doing business in India can learn more about the minimum wages in India through the Ministry of Labor and Employment database, which provides industry-wise wage norms. The new wage code can be accessed here, and the website for the chief labor commissioner can be accessed here.
Since determining wages in India is complex, and labor compliances are carefully monitored, it is recommended to seek advice from a local firm to assess costs and other liabilities. Otherwise the firm may be exposed to additional risks during times of labor unrest and strikes by workers that can lead to reputational and financial damage to the company.
How to structure a salary in India: Key components
Organizations pay salaries to their employees in exchange of the services obtained. These salaries often have different components, such as basic salary, allowances, perquisites, etc. It is important to understand how salaries are structured and the various methodologies associated with it while processing payroll.
A salary structure is the basic framework to work out the compensation plan of an employee. While structuring salaries is a crucial task for human resource (HR) and payroll personnel, many aren’t adept with the technical expertise required to create a salary structure with strong fundamentals. We thought of addressing the gap by curating a detailed guide on how to structure a salary in India.
Salary structure in India: Key terms
A salary structure aims to lay out the anatomy of the salary being offered in terms of the different components constituting the compensation plan. From the employee’s perspective, it is imperative to have basic knowledge of the different components of their salary to plan their finances with an aim to maximize their claims on the various tax exemptions available to them.
Let us understand a few important terms before proceeding further.
This is the salary that you get in your hands and is also called the ‘in-hand’ salary. This is the amount you get (or pay) after deduction, such as Provident Fund (PF), Employee State Insurance (ESI), Professional Tax (PT), Tax Deducted at Source (TDS), loss of pay and other deductions, as applicable by the company.
This is the total earning of an employee, excluding statutory and non-statutory deductions. It also includes loss of pay based on employee’s attendance.
CTC or cost-to-company is the total monetary benefit provided by the employer for the complete financial year. This will include components, such as the PF contribution from the employer, gratuity provision, any insurance that is being provided, or any other benefits.
Fixed pay and variable pay
Fixed pay is the fixed amount of money paid by an employer to its employees in exchange for services rendered by them, in the form of a fixed salary. Fixed pay is the accrual salary mentioned in the salary slip with basic and multiple allowances. It is the fixed amount received every month by the employees.
Sometimes, a salary structure of an employee has both fixed and variable elements. The variables and incentives might or might not be credited every month, depending on the company’s policy.
[tips title="Important Tip"]Fixed pay includes basic pay, dearness allowance (DA), house rent allowance (HRA), conveyance allowance, and other special allowances, etc.[/tips]
A good example of variable pay is the portion of compensation determined by an employee’s performance. When employees meet their revenue targets, variable pay is provided as an additional incentive, or commission. Variable pay is often based on two major factors: employee’s performance and company’s performance. So, most of such schemes designed by companies tie their variable components to targets and the actual pay-out is based on that combination.
Some common components of a salary structure
Basic salary is the base income of an employee, comprising of approximately 50 percent of the CTC. It is a fixed amount that is paid prior to any reductions or increases due to bonus, overtime, or allowances. Basic salary is determined based on the designation of the employee and the industry in which they are working in. Most of the other components, like allowances, are based on the basic salary. This amount is fully taxable.
Allowance is an amount payable to employees during their regular employment. It can be partially or fully taxable, depending upon the type of allowance. The allowances provided and their respective limits will differ from one company to another, as per their respective policies.
Types of allowances
1) Dearness allowance (DA): Dearness allowance is a certain percentage of the basic salary paid to employees, aimed at mitigating the impact of inflation. It is paid by the government to employees of the public sector and pensioners of the same. Dearness allowance is fully taxable whether it is “in terms” or “not in terms”.
Note: DA in terms means DA that constitutes a part of the retirement benefit calculation.
2) House rent allowance (HRA): House rent allowance is paid to employees to meet their monthly rental expenses for housing/ accommodation. It offers tax benefits to employees for the sum that they pay towards their housing/ accommodation every year. Salaried individuals residing in rented homes can claim this exemption and reduce their tax liability either fully or partially. If an employee doesn’t live in a rented accommodation, this allowance is fully taxable.
Least of the following amount will be exempt u/s 10(13A):
- 40%/50%* of basic salary and dearness allowance (DA)
- Actual amount received
- Rent paid – 10 percent of basic salary and dearness allowance (DA)
Note: Tax exemption of house rent allowance is not available in case you opt for the new tax regime from FY 2020-21 (AY 2021-22).
3) Conveyance allowance: Conveyance allowance, also known as transportation allowance, is an incentive offered to employees to compensate for their travel expenses to and from their residence and workplace.
Note: In the Union Budget 2018, a standard deduction of INR. 40,000 (currently INR 50,000) was introduced in lieu of transport (INR 19,200) and medical (INR 15,000) allowances.
4) Leave travel allowance (LTA): Leave travel allowance is eligible for tax exemption. It is offered to employees to cover their travel expense when the travel occurs during a leave of absence from work. The amount paid as leave travel allowance is exempted from tax only on the actual travel costs under Section 10(5) of Income Tax Act, 1961. Leave travel allowance only covers domestic travel and the mode of travel needs to be air, railway, or public transport. The exemption is also limited to LTA provided by the employer.
5) Medical allowance: Medical allowance is a fixed allowance paid to the employees of an organization to meet their medical expenditure.
Note: In Union Budget 2018, a standard deduction of INR. 40,000 (Currently it is INR 50,000) has been introduced in lieu of transport (INR 19,200) and medical (INR 15,000) allowances.
6) Books and periodicals allowance: Books and periodicals allowance is a type of allowance provided to employees for helping them meet the expenses associated with the purchase of books, periodicals, and newspapers. It is exempted from tax to the extent of actual expenditure incurred towards purchases of books and periodicals.
Perquisites, also referred to as fringe benefits, are the benefits that some employees enjoy because of their official position. These are generally non-cash benefits given in addition to the cash salary. Some examples of perquisites include provision of car for personal use, rent-free accommodation, payment of premium on personal accident policy, etc. The monetary value of perquisites gets added to the salary and tax is paid on them by the employee.
Bonus is a type of compensation an employer gives to an employee that complements their base pay or salary. A company may use bonuses to reward achievements, to show gratitude to employees who meet longevity milestones, or to entice prospective employees to join a company’s ranks. Bonus received by an employee is chargeable to tax in the year of receipt.
Gratuity is a lump sum benefit paid by employers to employees who are retiring from the organization. This is only payable to employees who have completed five or more years with the company. The gratuity amount is paid in gratitude for the services rendered by the individual during the period of employment. Most firms with a workforce of 10 or more employees fall under the purview of the Indian Law.
Gratuity received during the employment is fully taxable whereas gratuity received at the time of retirement is exempted u/s 10(10) in the following cases:
For government employees: Amount of gratuity is fully exempted
For non-government employees: For private sector employees covered under the Payment of Gratuity Act, 1972, the exempted amount will be the lowest amongst the following:
- 15/26 x salary per month x number of completed years of service
- Actual amount received
- Maximum INR 2 million
For employees not covered under Payment of Gratuity Act, 1972, the exempted amount will be the lowest among the following:
- 1/2 x average salary per month x number of completed years of service
- Actual amount received
- Maximum INR 2 million
Professional tax is a tax levied on the income earned by salaried employees and professionals, including chartered accountants, doctors, and lawyers, etc. to the state government. Different states have varying methods of calculating professional tax. The maximum amount that is payable in a year is INR 2,500. Employers deduct professional tax at prescribed rates, from the salary paid to employees, and pay it on their behalf to the State Government. The revenue collected is used towards the Employment Guarantee Scheme and the Employment Guarantee Fund.
If a company has 10 or more employees (20 in case of Maharashtra and Chandigarh) whose gross salary is below INR 21,000 per month, then the employer is required to avail ESIC scheme for such employees. The employer’s contribution will be 4.75 percent of gross salary, whereas the employee’s contribution will be 1.75 percent of gross salary.