India's Labour Overhaul: What the New Codes Mean for Your Wallet
The Indian government has ushered in a significant transformation of the country's labour landscape by consolidating numerous employment statutes into four comprehensive codes. This restructuring fundamentally changes how critical components like wages, gratuity, provident fund (PF), pension, and other social security benefits are calculated, creating important implications for both employees and employers across the nation.
The New Standardized Definition of Wages
At the heart of these changes is a standardized definition of 'wages' that applies uniformly across all four new labour codes. According to The Code On Wages, 2019, the term 'wages' now encompasses basic pay, dearness allowance (DA), and all other retaining allowances that form part of your cost-to-company (CTC), excluding specific components.
The major exclusions from this definition include house rent allowance (HRA), conveyance allowance, the employer's PF contribution, and commission. However, there's a crucial cap: these excluded components together cannot exceed 50% of your total remuneration. This means that at least half of your CTC will now be classified as 'wages' for calculating essential benefits.
How Your Gratuity and PF are Affected
The impact on gratuity is substantial and positive for employees. Previously, gratuity was calculated based only on basic pay plus DA. Many companies maintained low basic plus DA figures while compensating employees through various allowances, which kept the gratuity calculation base artificially small.
Under the new framework, gratuity will be calculated on a base that constitutes at least 50% of your CTC, potentially leading to significantly higher gratuity payouts upon leaving a job or retiring.
For provident fund contributions, the changes are more nuanced. PF calculations continue to be governed by existing EPF, Employees' Pension Scheme (EPS), and Employees' Deposit-Linked Insurance (EDLI) schemes, which remain in force. The mandatory PF contribution is still calculated on wages up to ₹15,000, as per the current EPF scheme.
Puneet Gupta, partner at People Advisory Services–Tax, EY India, clarifies: "The labour code itself specifies that the current schemes will continue in the foreseeable future, so the ₹15,000 ceiling will apply. PF calculation on the new 'wages' definition will matter only for employees whose basic plus DA is below ₹15,000."
Eligibility Changes and Implementation Timeline
The new codes bring welcome news for fixed-term employees regarding gratuity eligibility. The minimum service requirement for gratuity has been reduced from five years to one year for fixed-term employees. This category includes any worker whose employment contract has a predetermined end date, even if the contract is regularly renewed.
However, this relaxation doesn't extend to permanent, on-roll employees, who must still complete five years of service to qualify for gratuity, unless their exit is due to death or disability.
Parizad Sirwalla, partner and head of global mobility services, tax, at KPMG in India, offers a note of caution: "While clarity is awaited, in the case of a recurring renewal of a fixed-term contract, with no gap or termination in service, the same may not strictly be construed as fixed-term employment."
Regarding implementation, the changes to gratuity calculation are already effective. The erstwhile Act governing gratuity was repealed effective 21 November 2025, making the new, broader definition of wages applicable for gratuity calculations from that date forward.
Puneet Gupta confirms that this change applies retrospectively, meaning anyone who leaves a job or retires after 21 November 2025 and is eligible for gratuity can expect a higher payout based on the new wage definition, unless the government introduces a new rule that removes this retrospective impact.
Impact on Your Take-Home Salary and Company Strategies
For most employees, take-home pay remains largely unaffected in the immediate term. Since gratuity is paid upon exit and isn't deducted from monthly salaries, it doesn't reduce regular earnings. Similarly, PF contributions continue with the existing ₹15,000 wage cap, meaning most employees will see no change in their contributions.
The exception applies to employees earning below ₹15,000, who might experience a small increase in PF contribution and a corresponding minor reduction in take-home pay.
Companies are likely to adjust their compensation strategies in response to these changes. While they may revise salary structures for new hires to align with the broader wages definition, existing employees will probably see minimal changes to their current packages.
Sirwalla notes that employers cannot restructure pay solely to reduce their liability under the codes. Employees with low or no HRA or conveyance allowance might see adjustments to include these components, optimizing their salary structure according to the new definition of wages.
Overall, the new labour codes represent a significant step toward standardizing and modernizing India's employment framework, with gratuity emerging as the biggest beneficiary for employees while maintaining stability in take-home salaries for the majority of the workforce.
