Take-home pay may dip temporarily, expect retirement savings to rise
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The new labour codes represent a major reform aimed at improving ease of doing business while strengthening worker benefits.
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The notification of four new labour codes marks a historic shift in India’s labour governance. By simplifying decades-old regulations, the codes aim to create a more efficient and future-ready world of work. However, both employers and employees must prepare for significant changes in wages, provident fund (PF), gratuity, fixed-term employment and tax outcomes across both tax regimes.
Impact on employees
The new labour codes represent a major reform aimed at improving ease of doing business while strengthening worker benefits. Key employee gains include a uniform national minimum wage, timely salary payments (by the seventh of the following month), faster final settlements (within two days), extended gratuity entitlement for fixed-term employees and safer night-shift participation for women.
“The codes also restrict contract labour in core activities, promote permanent employment, allow leave encashment beyond 30 days and, importantly, bring gig workers under social security for the first time,” says Alok Agrawal, partner, Deloitte India.
Impact on salary and CTC
The new definition of wages introduces uniformity across all labour codes, replacing the earlier system in which each law had its own definition. “Key changes include a clearly defined list of exclusions and a formula that treats any excluded components exceeding 50 per cent of total remuneration as part of wages for statutory calculations,” says Arjun Paleri, partner, BTG Advaya.
This will prompt employers to revisit salary structures. “While wages may not necessarily rise or fall, components like house rent allowance (HRA) and other allowances — now explicitly excluded — will need to be balanced within the 50 per cent cap. Any excess will be added back to wages for PF, gratuity and other benefits,” adds Paleri.
As a result, the revised definition may affect CTC composition, monthly take-home pay and end-of-service benefits.
Agrawal points out that under the new rules, the wage base for contributions will depend on an employee’s salary structure but generally cannot be below 50 per cent of CTC — and may even be higher. “If employers keep overall CTC unchanged, higher statutory contributions will reduce employees’ monthly take-home while boosting their future retirals. Alternatively, if employers want to protect current net pay, they may need to increase their overall cost to absorb the additional contribution,” he adds.
The codes also cap total deductions at 50 per cent of wages to ensure employees retain sufficient income for living expenses.
Impact on retirement savings
Under the new labour codes, the broadened definition of wages means PF contributions will be calculated on a larger share of salary for employees who are not “excluded”. This may increase PF contributions and, with annual interest (around 8 per cent in recent years), build a larger retirement corpus over time.
Employees with a basic salary above Rs 15,000 per month are treated as “excluded employees” under the current PF law, meaning neither they nor their employers are legally required to contribute. “Courts have also allowed PF contributions for such employees to be limited to basic salary, even if some allowances technically fall within ‘basic wages’. If the government retains these principles in the new codes, PF contributions for excluded employees may remain unchanged, though the Rs 15,000 threshold itself may be revised when the new PF scheme is notified,” says Agrawal.
Paleri points out that the new labour codes continue to allow employees to make voluntary PF contributions above the statutory minimum, enabling faster corpus growth for those who opt in. “While PF contribution rates are expected to remain the same, the revised definition of wages may increase PF contributions for employees whose PF was earlier calculated only on basic pay. The overall impact will ultimately depend on how employers apply the new wage definition within their payroll structures,” he says.
Impact on gratuity payment
Under the earlier Payment of Gratuity Act, gratuity was calculated only on basic pay and dearness allowance. Under the new labour codes, the broadened definition of wages means gratuity will be computed on a larger share of salary, possibly increasing the payout, especially if one-time or performance-linked pay is not excluded in the final rules. Further, “if an employer does not cap gratuity at Rs 20 lakh (the earlier statutory limit), many employees may become eligible for higher payouts,” says Agrawal.
Benefits for fixed-term employees
Gratuity is now payable after just one year of continuous service instead of the earlier five-year requirement. PF contributions will apply at the same rate as for permanent staff, ensuring parity. “With improved portability and Aadhaar-linked systems, fixed-term employees (FTE) can also carry their PF and social-security benefits more easily across jobs,” says Sandeep Jhunjhunwala, partner, Nangia Group.
“The codes also reinforce equal treatment for FTE and permanent employees, reducing benefit gaps and creating a more balanced rewards structure. Overall, these changes enhance financial security for FTE and make fixed-term roles more attractive and equitable,” says Pooja Ramchandani, partner, Shardul Amarchand Mangaldas & Co.
Impact on tax liability
The new labour codes — especially the rule requiring basic wages and dearness allowance to form at least 50 per cent of total pay — will influence tax outgo under both tax regimes. A higher basic salary raises PF and gratuity contributions, boosting retirement savings but lowering take-home pay.
“Under the old regime, employees may benefit from higher Section 80C deductions (due to increased PF contributions) and possibly larger HRA exemptions. Under the new regime, where most deductions are unavailable, the main issue is whether employer contributions to PF, NPS and superannuation exceed the Rs 7.5 lakh annual cap; any excess and related interest become taxable,” says Jhunjhunwala.
Employees may need to reassess which tax regime is more beneficial once revised salary structures take effect.
Transitional challenges to expect during implementation
Employees can expect changes to their pay structure as organisations adopt the unified definition of wages. With more of the CTC falling under the statutory wage base, payroll teams will revise PF, gratuity, overtime and other statutory calculations. Some overlap between old and new processes may occur until all rules are notified.
“Offer and appointment letters may also be updated to reflect revised wage structures, benefit formulas, working hours, overtime protocols and night-shift safeguards. Overall CTC is unlikely to reduce, though some employees may see a slight drop in take-home pay due to higher PF contributions. Clear communication from employers on updated policies will be key during this transition,” says Ramchandani.
Tax-planning opportunities
According to tax experts, the new labour codes are not designed for tax planning, but they do create an opportunity for employees to reassess their finances. “With a higher basic pay component, employees should re-evaluate whether the old or new tax regime is more advantageous, especially given potential increases in PF deductions and HRA exemptions. Those prioritising retirement savings may also consider voluntary PF or NPS contributions,” advises Jhunjhunwala.
Overall, reviewing the revised salary structure and aligning tax choices with long-term goals will help maximise benefits under the new framework.
Pitfalls to watch out for
Employees should remain alert to a few transition challenges under the new labour codes. “Take-home pay may dip temporarily as salary components are restructured. Fixed-term employees should ensure the new one-year gratuity eligibility is correctly applied,” informs Jhunjhunwala.
Finally, employees should avoid rushing into a tax-regime switch until they reassess how revised salary structures, PF contributions and HRA affect overall tax liability.
(The writer is a Delhi-based independent journalist)
How the new labour codes may impact your finances
Possible reduction in take-home pay: With more components counted as wages, PF and gratuity contributions may rise, reducing monthly take-home
Larger PF contributions and retirement corpus: PF will be calculated on a broader salary base, increasing long-term retirement savings
Higher gratuity payouts: Gratuity will be computed on a wider portion of salary, and payouts may rise, especially if employers do not cap them at Rs 20 lakh
Faster settlements: Salaries must be paid by the seventh of the following month; final dues must be cleared within two days
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