Key Takeaways
Wages must now be at least 50% of CTC under the Code on Wages, pushing most companies to raise basic pay.
Take-home pay may dip 2 to 5% in the short term, but PF and gratuity payouts rise significantly over time.
Fixed-term and gig workers gain new statutory protections, including gratuity after one year and social security coverage.
With the Labour Code 2025 set to reshape how Indian companies structure compensation, HR and compensation leaders must begin preparing for a compliant salary structure in India as per labour law. The new wage definition, where basic pay, dearness allowance, and eligible inclusions must form at least 50% of total CTC, will directly impact take-home pay, PF contributions, gratuity, and employee sentiment. Navigating this transition requires a structured approach that balances statutory requirements with employee experience and clear communication.
What this guide covers
- Audit current salary structures to identify non-compliant roles and allowance-heavy pay mixes.
- Model impacts and scenarios to understand take-home changes, PF and gratuity increases, and tax implications.
- Design compliant templates that meet the 50% wage rule while maintaining internal equity.
- Implement and communicate changes with clarity, alignment, and employee-first messaging.
- Monitor and optimise compliance through regular audits, benchmarking, and proactive corrections.
What are the four labour codes and how do they affect salary?
India's salary rules did not change in isolation. They are part of a consolidation of 29 older labour laws into four codes, effective from 21 November 2025, with full operational enforcement targeted for 1 April 2026 and state-level notification still rolling out in some regions.
Code on Wages, 2019
This code introduces the uniform definition of wages and the 50% rule that drives most of the changes in this guide. It also covers timely payment of wages, minimum wage requirements, and bonus eligibility.
Code on Social Security, 2020
This code expands EPF, ESI, gratuity, and maternity benefit coverage, and for the first time formally extends social security to gig and platform workers.
Industrial Relations Code, 2020
This code governs hiring, retrenchment, and dispute resolution, and standardises rules around fixed-term employment.
Occupational Safety, Health and Working Conditions Code, 2020
This code covers workplace safety, working hours, overtime pay, and the option for employers to offer a four-day work week, provided total weekly hours stay within 48.
Together, these four codes are why a salary slip in 2026 looks structurally different from one issued in 2024, even when the total CTC has not changed.
Why restructure now?
With the implementation of the Code on Wages, 2019, now fully part of the Labour Code 2025 regime in India, the definition of "wages" has fundamentally changed. Under the new law, wages are defined as basic pay + dearness allowance (DA) + statutory inclusions, and this must make up at least 50% of the total cost to company (CTC).
Any allowances or exclusions, such as bonus, overtime, or non-statutory perks, are only permitted if they do not push the excluded portion beyond 50% of total CTC. If exclusions exceed that threshold, the excess amount becomes part of wages, triggering higher statutory obligations.
Penalties for violations can include fines of up to ₹50,000 for a first offence, rising to ₹1 lakh plus possible imprisonment for repeat violations within five years, alongside retrospective liabilities such as unpaid Provident Fund dues and gratuity obligations.
| Component | Old structure (% CTC) | New compliant structure (% CTC) |
|---|---|---|
| Basic + DA | 25-40% | ≥50% |
| Allowances (exclusions) | 60-75% | ≤50% |
| PF and gratuity base | Lower | 10-25% higher |
Communicate change with clarity
Empuls helps you explain salary restructuring to employees in ways they understand and trust, with total rewards visibility and financial wellness resources.
Explore EmpulsTrusted by 5,000+ companies
What qualifies as wages under the new definition?
Components that count as wages
Basic pay, dearness allowance, and retaining allowance (where applicable) are the only components that automatically count as wages. Together, these must equal at least half of an employee's total CTC.
Components that are capped, not excluded
House rent allowance, conveyance, special allowance, overtime pay, and most bonuses are classified as exclusions. These can make up no more than 50% of total CTC. The Ministry of Labour and Employment clarified in March 2026 that overtime allowance is included within this 50% wage floor computation.
Components treated separately
Gratuity is excluded from the 50% wage calculation entirely. Employer contributions to PF and pension are treated as statutory components and do factor into the threshold, while ESI and certain retirement payouts generally sit outside it.
Step-by-step guide to restructuring salaries under the Labour Code 2025
Step 1: Audit current salary structures
Begin by establishing a clear baseline of how your current pay mix aligns with the mandated 50% wage requirement.
- Flag employees falling below the 50% threshold. Junior roles usually have the widest gaps due to high allowances.
- Review the last six months of pay slips to identify patterns in special allowances, variable components, or reimbursements that may need reclassification.
- Segment employees by band to prioritise where restructuring effort is most urgent.
While auditing, also check your lowest pay bands against the latest minimum wage notification. Unskilled workers in metro areas under central sphere employment must now be paid at least ₹21,346 per month as of the April 2026 revision.
Step 2: Model impacts and scenarios
| CTC (₹) | Old take-home | New take-home | PF increase | Tax savings |
|---|---|---|---|---|
| 5L | 35k/m | 32k/m | +2K/M | +5k/Year |
| 15L | 90k/m | 85k/m | +4K/M | +15K/Year |
- Recalculate PF and gratuity using the corrected wage base.
- Build comparison scenarios showing the trade-offs clearly.
- Model the average take-home dip across bands. Most analysts now expect a 2-5% dip for organisations that offset with CTC adjustments.
Step 3: Design compliant salary templates
Redesign CTC templates so basic pay and DA make up 50-55% of total compensation.
- Restrict allowances to statutory or role-linked components such as HRA, conveyance, medical reimbursements, and performance pay.
- Use differentiated templates by level. Junior employees at 50% basic ratio; senior roles at 55% to optimise gratuity.
- Test templates across multiple months of simulated payroll.
Step 4: Implement and communicate changes
- Update offer letters, employment contracts, and payroll rules.
- Reconfigure HRIS and payroll engines.
- Frame the narrative around long-term financial wellbeing, higher PF, increased gratuity, and better retirement security.
Step 5: Monitor and optimise compliance
- Conduct quarterly internal audits using HRIS or payroll data.
- Benchmark your new salary structure against peer organisations.
- Revisit role-based templates annually.
How the 7th day payment rule and 48-hour settlement rule work
Under the Code on Wages, 2019, wages must now be paid by the 7th day after the end of the wage period. When an employee resigns, is terminated, or is retrenched, the employer must complete the full and final settlement within 48 hours. Gratuity follows a separate 30-day timeline under the Payment of Gratuity Act.
How the new rules affect fixed-term and gig workers
Fixed-term employees
Fixed-term and contract employees are now eligible for pro-rata gratuity after just one year of continuous service, down from five years. The law also requires that fixed-term employees receive the same wages, hours, and social security benefits as permanent employees doing similar work.
Gig and platform workers
For the first time, gig and platform workers are formally recognised under India's social security framework. Digital aggregators are required to contribute a percentage of annual turnover to a central Social Security Fund.
Tax implications of the 50% wage rule
HRA exemption under Section 10(13A) of the Income Tax Act is calculated using the lowest of three values, one of which is the actual HRA received. When HRA shrinks as a share of CTC to comply with the 50% rule, the exemption available to employees in metro cities can fall. The offset is on the PF side: higher basic pay means higher PF contributions which can partially balance the reduced HRA exemption.
Which industries are most affected?
The IT and software services sector faces the steepest structural disruption, since many companies have maintained basic pay ratios as low as 20 to 35% of CTC. BFSI and large-scale manufacturing tend to see a smaller disruption. Sectors with significant overtime exposure, including manufacturing and logistics, face an added complication now that overtime counts toward the wage floor calculation.
How Xoxoday supports HR leaders navigating the new labour code shift
Navigating compliance during a major salary restructuring requires clarity, tools, and confidence. HR leaders need to communicate the changes in ways that help employees understand the long-term benefit, even when take-home dips in the short term. They also need systems that track compliance, run multiple scenarios, and integrate payroll data with the narrative around financial wellness.
That's where Empuls comes in. Empuls is a unified platform that helps HR leaders and their teams stay aligned through periods of change. With built-in total rewards statements, employees see their full compensation picture-including higher PF and gratuity payouts-not just their monthly take-home. Engagement surveys let leaders understand how teams are responding to restructuring, so you can address concerns before they become issues. And recognition tools ensure that even as pay structures shift, the culture of appreciation and celebration stays strong.
During a transition like this, a single platform that brings together benefits clarity, financial wellness resources, and ongoing recognition means employees feel supported, not just informed. It's the difference between a restructure that employees simply endure and one they actually understand and trust.
