What Are the New Labour Codes?
India has consolidated 29 central labour laws into four Labour Codes:
- Code on Wages, 2019 — minimum wages, payment of wages, bonus, equal pay
- Industrial Relations Code, 2020 — trade unions, standing orders, disputes
- Code on Social Security, 2020 — PF, ESI, gratuity, maternity benefits
- Occupational Safety, Health and Working Conditions Code, 2020 — working hours, leave, safety
All four came into force on 21 November 2025. Central rules were notified in 2026, and states are notifying their own rules at different speeds, so some operational details still vary by state.
For employees, the change you will actually see is on your salary slip.
The 50% Wage Rule Explained
Earlier, each law had its own definition of wages, and many employers kept basic pay at 30-40% of salary with the rest paid as allowances. Since PF and gratuity were calculated on basic pay, a low basic meant lower statutory costs — and smaller retirement savings for the employee.
The Codes use one definition of wages:
- Included: basic pay, dearness allowance, retaining allowance
- Excluded: HRA, conveyance, overtime, commission, statutory bonus, employer PF contribution, and similar items
The catch is the cap. If the excluded items add up to more than 50% of your total remuneration, the excess is added back to wages.
Worked Example: Before and After
Take an employee with a gross salary of Rs. 60,000 a month.
| Old structure | Under the 50% rule | |
|---|---|---|
| Basic pay | 18,000 (30%) | 30,000 (50%) |
| HRA and other allowances | 42,000 (70%) | 30,000 (50%) |
| Gross salary | 60,000 | 60,000 |
| Wages for PF and gratuity | 18,000 | 30,000 |
| Employee PF (12%, on wages up to the ceiling) | 1,800 | 3,000 |
| Gratuity accrued per year of service | 10,385 | 17,308 |
| Take-home before tax | 58,200 | 57,000 |
What happened:
- Allowances of Rs. 42,000 were 70% of pay. The Rs. 12,000 above the 50% limit is now treated as wages.
- PF is calculated on a higher base. With the EPF wage ceiling now at Rs. 25,000, the mandatory contribution is 12% of Rs. 25,000 = Rs. 3,000. (The old figure assumes PF capped at the earlier Rs. 15,000 ceiling.)
- Gratuity for each year of service rises from Rs. 10,385 to Rs. 17,308, using the formula wages × 15 / 26.
- Take-home pay falls by Rs. 1,200 a month, but that money — plus a matching employer contribution — goes into the employee's own PF account.
Your own numbers depend on how your employer restructures pay and whether PF is paid on full wages or on the ceiling.
What Changes on Your Salary Slip
1. A higher basic pay line
Expect basic pay (plus DA) to be at least half of your gross pay, with smaller special allowances.
2. A larger PF deduction
A higher wage base and the new Rs. 25,000 EPF wage ceiling both push the PF deduction up for many employees.
3. Overtime at double rate
Work beyond 8 hours a day or 48 hours a week must be paid at twice the ordinary rate of wages. See the overtime calculation guide.
4. Wages paid on time
Monthly wages are due by the 7th of the following month. If you resign or are terminated, your final wages must be paid within two working days.
5. A payslip every pay period
Employers must issue wage slips in electronic or physical form. If you are not receiving one, you are entitled to ask for it.
Gratuity Changes
- Permanent employees: still eligible after 5 years of continuous service
- Fixed-term employees: eligible after 1 year, on a pro rata basis
- Formula: last drawn wages × 15 / 26 × years of service
- Cap: Rs. 20 lakh
- Base: the statutory definition of wages, so a restructured salary produces a larger payout
Does CTC Change?
Usually not. Employers generally keep CTC the same and move money between components. More of the CTC goes to employer PF and gratuity provisions, and less to monthly allowances. Read CTC vs in-hand salary to see how each component flows through to your bank credit.
What Employees Should Do
- Compare payslips: Put a recent payslip next to one from before the restructuring and check basic pay, PF, and net pay
- Ask for a revised salary breakup if your structure changed without one
- Check your PF passbook to confirm the higher contribution is being deposited
- Review your tax regime: HRA exemption only helps under the old regime, and a smaller HRA may change which regime suits you
- Keep every payslip: They are your evidence for gratuity and full-and-final calculations
What Employers Should Do
- Audit every salary structure against the 50% test
- Re-estimate PF, gratuity, bonus, and leave encashment costs
- Issue revised salary breakups and explain the change to employees
- Update payslip formats so wages and allowances are clearly itemised
- Follow the full payroll compliance checklist for 2026
Conclusion
The Labour Codes shift pay away from allowances and towards wages. For most employees that means a slightly lower monthly credit in exchange for larger PF savings and gratuity. The salary slip is where this shows up first, so read yours carefully this year.
Want to see how a restructured salary looks on paper? Build one in minutes with our free salary slip generator.
This article is general information, not legal advice. Rules vary by state and establishment.