What the labour codes did to Indian salary structures
Last updated: 2026-08-14
India's four labour codes came into force on 21 November 2025. For salaried employees the consequential one is the Code on Wages, which redefined what counts as "wages" and in doing so changed the base on which provident fund and gratuity are computed.
The change is widely described as "basic must be at least 50 per cent of CTC". That is a useful shorthand and it is not what the statute says, and the difference matters if you are trying to work out what your payslip will do.
What the rule actually says
Under section 2(y), wages means basic pay, dearness allowance and retaining allowance. A list of components is excluded: house rent allowance, conveyance, statutory bonus, overtime, gratuity and employer provident fund among them.
The operative provision is an add-back. Where those excluded components exceed one half of total remuneration, the excess is deemed to be wages. Employer provident fund is excluded from wages but is still counted in total remuneration when applying the test.
| Step | Working | Amount |
|---|---|---|
| Basic as structured | 30% of Rs 12,00,000 | Rs 3,60,000 |
| Excluded components | Rs 12,00,000 − Rs 3,60,000 | Rs 8,40,000 |
| Permitted at one half | 50% of Rs 12,00,000 | Rs 6,00,000 |
| Excess added back to wages | Rs 8,40,000 − Rs 6,00,000 | Rs 2,40,000 |
| Statutory wage base | Rs 3,60,000 + Rs 2,40,000 | Rs 6,00,000 |
What changes, and what does not
The add-back raises the base for provident fund and gratuity. It does not raise your basic salary, and it does not change your gross pay.
| Item | Effect of the add-back |
|---|---|
| Basic salary on your payslip | Unchanged |
| Gross salary | Unchanged |
| Provident fund base | Higher |
| Gratuity accrual | Higher |
| Monthly take-home | Slightly lower |
| Retirement corpus | Higher |
It is deferred saving rather than lost money. Whether that is welcome depends on whether you needed the cash this month or the corpus in thirty years, and the codes have made that choice for you.
The effect is largest for basic-light structures, which is most of the private sector. Where employers capped provident fund at Rs 1,800 a month against the Rs 15,000 statutory wage ceiling, the cap continues to apply, so the practical impact is smaller than the headline suggests for many employees.
The provident fund ceiling did not move
Through 2026 the provident fund wage ceiling was widely reported as rising from Rs 15,000 to Rs 25,000 a month. It did not. The Ministry of Labour notification of 29 May 2026 gave statutory recognition to the existing Rs 15,000 ceiling under the Code on Social Security, 2020 rather than raising it. Any calculation built on Rs 25,000 is wrong for FY 2026-27.
Common questions
Will my take-home fall?
Slightly, if your structure is allowance-heavy and your provident fund is computed on actual basic rather than capped. If your employer caps provident fund at Rs 1,800 a month, the change may not touch your payslip at all.
Does this change my income tax?
Not directly. Gross salary is unchanged, so taxable salary is broadly unchanged. A larger provident fund contribution can increase your Section 80C deduction under the old regime.
Does my employer have to restructure my salary?
The obligation is on the statutory computation rather than on the payslip layout. Many employers have chosen to restructure anyway, because computing on a deemed base while presenting a different one is harder to administer.
Does it affect gratuity?
Yes. Gratuity accrues on the same wage base, so the add-back raises what you eventually receive on leaving.
See the effect on your own structure with the in-hand salary calculator, which shows the statutory wage base and any add-back separately from your entered basic.
What the add-back does at different basic levels
The add-back only bites where allowances exceed half of the package. A structure already at or above fifty per cent basic is unaffected.
| Basic as structured | Excluded components | Added back | Statutory wage base |
|---|---|---|---|
| 30% (Rs 3,60,000) | Rs 8,40,000 | Rs 2,40,000 | Rs 6,00,000 |
| 40% (Rs 4,80,000) | Rs 7,20,000 | Rs 1,20,000 | Rs 6,00,000 |
| 50% (Rs 6,00,000) | Rs 6,00,000 | Rs 0 | Rs 6,00,000 |
| 60% (Rs 7,20,000) | Rs 4,80,000 | Rs 0 | Rs 7,20,000 |
Every structure below fifty per cent converges on the same statutory wage base. Above it, the base simply follows the actual basic. That convergence is the whole effect of the rule.
Related reading
The rest of this series, and the calculators that let you run the idea on your own numbers.
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