In a significant move impacting India's vast workforce, the Union Ministry of Labour and Employment has unveiled draft rules outlining the implementation of crucial provisions under the new labour codes. These rules, released more than a month after the codes came into effect, provide clarity on minimum wages, gratuity, and social security for over 400 million workers across the country.
Redefining Wages and Gratuity Calculation
The government has brought into force a revised definition of 'wages' and a new formula for calculating gratuity, effective from 21 November 2025. The four consolidated labour codes—the Code on Wages, 2019; Industrial Relations Code, 2020; Code on Social Security, 2020; and the Occupational Safety, Health and Working Conditions Code, 2020—aim to simplify 29 older laws.
Under the new framework, the term 'wages' will now encompass basic pay, dearness allowance (DA), and retaining allowance. A critical change mandates that at least 50% of an employee's total remuneration must be classified as wages. This move directly counters the previous practice where employers structured salary packages with a minimal basic pay and DA component, loading the rest into various allowances that were excluded from statutory benefit calculations like gratuity and provident fund (PF).
Now, every element of the cost-to-company (CTC) will be treated as remuneration unless specifically exempted, with total exemptions capped at 50% of the compensation. This expansion of the wage base is expected to increase employer contributions towards PF and gratuity. The ministry clarified that leave encashment will not be part of allowances and that this definition applies uniformly across all four codes for statutory calculations.
Enhanced Compliance and Worker Welfare Measures
The draft rules, which were initially notified in 2019-20 and have been reissued after nearly five years, introduce stricter compliance requirements and emphasize digitization. Stakeholders have been given 45 days to provide feedback on the proposals.
Puneet Gupta, Partner, People Advisory Services-Tax at EY India, highlighted key mandates: "Employers will need to issue appointment letters in a prescribed format within three months of the rules coming into force, maintain registers for wages, attendance, and women employees, and file unified annual returns." He added that establishments with 500 or more workers must form safety committees, while those with 20 or more workers need to set up grievance redressal committees.
Other notable provisions focus on worker welfare. These include annual medical check-ups for employees above 40 in sectors like factories, docks, mines, and construction; a creche allowance of at least ₹500 per child where creche facilities are absent; and travel allowances for inter-state migrant workers. Furthermore, the rules stipulate double wages for work exceeding 48 hours a week and mandate that employers ensure substituted rest days without exceeding ten consecutive working days.
Clarity for Businesses and Future Implications
The draft rules offer much-needed operational clarity. For instance, the social security rules specify that gratuity will be calculated on the 'wages' last drawn, explicitly excluding components like annual performance-linked pay, medical reimbursements, stock options, and meal vouchers. Experts state this will help organizations estimate their gratuity liability more accurately.
The consultative approach is seen as vital for a smooth transition. As businesses digest the changes, the emphasis is on proactive preparation. "These changes reflect a strong emphasis on health, safety, and social security, and businesses should start preparing now to ensure smooth compliance once the rules are finalized," advised Gupta. The rollout marks a pivotal shift in India's labour landscape, aiming to balance worker protection with streamlined regulations for employers.
