Salary Impacts of Labour Code Reform: Who Reaps the Greatest Benefits?

Labour Codes Reshape Salary Structures, Impacting Income Groups Differently

The new labour codes, which came into effect on November 21, 2025, are set to reshape how salaries are structured in India. The impact of these codes will differ across income groups, as the definition of 'wages' now requires it to form at least 50 percent of total remuneration.

This shift effectively limits the earlier practice of inflating take-home pay through allowances such as House Rent Allowance (HRA), bonuses, commissions, and conveyance. Under the new framework, if these exclusions exceed 50 percent, the excess is added back to wages, ensuring that basic pay, dearness allowance, and retaining allowance together form a larger share of salary.

The new labour codes include the Code on Wages, the Industrial Relations Code, the Code on Social Security, and the Occupational Safety, Health and Working Conditions Code. Draft rules were issued later in December, following the implementation of these codes.

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Early-Career Professionals to Gain from the Shift

Early-career professionals are expected to benefit the most from this shift. Their compensation structures are typically less optimized for tax efficiency and more fixed in nature. While there may be a marginal dip in take-home pay due to increased PF contributions, the real upside lies in significantly stronger gratuity and provident fund accumulation over a long career horizon.

Mid and High-Level Professionals to See Structured Compensation and Improved Long-term Savings

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Mid-level professionals will see more structured compensation and improved long-term savings. However, high earners with large variable pay and allowance-heavy structures may see a reduction in take-home salary in the short term as a greater portion moves into fixed wages.

High earners stand to benefit from higher gratuity payouts on resignation or retirement, as gratuity is calculated on deemed wages. They can also avail themselves of the 'excluded employee' option under the EPF Scheme to manage their take-home pay.

The 'Excluded Employee' Option

An excluded employee is a member who earns more than the statutory limit (currently Rs 15,000 per month) and did not have an active EPF account when they joined their current company. This status gives them the unique choice to either opt out to maximize their monthly take-home pay or opt in to build a larger long-term retirement corpus.