Government Unveils New Labour Code with Significant Implications for Employee Compensation

Labour Law Overhaul Takes Shape: What it Means for Pay Packs and Retirement Savings

The long-awaited labour law overhaul is beginning to show its real impact on pay packets. With the new wage definition already in force, companies are recalibrating salary structures, while employees are trying to understand what it means for their take-home pay and retirement savings. The new labour code kicked in from April 1.

At the centre of this shift is the much-discussed 50 percent rule, which could change how salaries are broken up and how benefits like provident fund (PF) and gratuity are calculated. The four labour codes that include the Code on Wages, the Industrial Relations Code, the Code on Social Security, and the Occupational Safety, Health and Working Conditions Code, came into effect on November 21, 2025, with draft rules issued later in December.

A new wage definition is already in force, which includes a broader set of salary components, with limited exclusions. For companies, this means higher gratuity payouts as the base used for calculation has expanded, with the financial impact linked to an employee’s entire service period. The new framework also widens eligibility, bringing fixed-term employees who complete at least one year of service within the ambit of gratuity benefits.

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Wage Definition Comparison

Under the new definition, wages should form at least 50 percent of the total remuneration paid to an employee. This changes the salary structure by reducing the proportion of allowances and increasing the basic wage component, which, in turn, can raise EPF and gratuity contributions while slightly lowering take-home pay if the overall CTC remains the same.

The government has clarified that while arriving at total remuneration, variable pay and stock-linked benefits do not need to be covered. The government has also issued a set of frequently asked questions (FAQs) to provide clarity on how wages are computed. While the intent as per the FAQs seems to be to restrict wages to 50 percent of remuneration, the same has not been incorporated in the law itself.

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For employees, the biggest visible change could be a reduction in take-home salary. As basic pay rises to meet the 50 percent threshold, contributions towards PF and other statutory benefits are also likely to increase. While this may reduce monthly income, it could strengthen long-term savings. Higher contributions mean a larger retirement corpus, and a higher wage base leads to increased gratuity payouts.

For employers, however, the change could push up overall costs, prompting a review of compensation structures to balance compliance and cost efficiency. Many organisations are still in the process of adapting to the new structure. While larger corporates are relatively well-aligned and have already started recasting salary frameworks, a significant number of companies are still working through the changes.

Communication will also be critical as companies explain changes in salary slips, especially the trade-off between lower take-home pay and higher long-term benefits. Over time, salary structures are expected to become more standardised and transparent. For employees, the change may require short-term adjustment, but it also promises stronger social security benefits in the long run.