At the core of the reform is a uniform definition of “wages”, limited to basic pay, dearness allowance and retaining allowance, which must together form at least 50% of an employee’s CTC—reshaping salary structures, taxation and retirement savings. All other components, including HRA, bonuses, commissions and incentives, are capped, with any excess automatically reclassified as wages, curbing salary splitting and standardising wage calculations.
The restructuring of salary components to comply with the 50% wage threshold is likely to result in a higher proportion of taxable salary.
One of the most consequential labour reforms of 2025 was the government’s comprehensive overhaul of India’s wage and salary framework for salaried professionals. With effect from November 21, 2025, all four consolidated labour codes — the Code on Wages (2019), the Industrial Relations Code (2020), the Code on Social Security (2020), and the Occupational Safety, Health and Working Conditions Code (2020)—were operationalised. Together, these laws replace a fragmented regulatory regime with a standardised, legally binding framework governing pay, benefits and worker protection.
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At the heart of the reform lies a uniform definition of “wages”, which has far-reaching implications for salary structures, taxation and retirement savings. Under the new regime, wages consist only of basic pay, dearness allowance (DA) and retaining allowance, where applicable. Crucially, these components must together account for at least 50% of an employee’s total remuneration or cost to company (CTC).
Other salary elements—such as house rent allowance (HRA), bonuses, commissions, incentives, overtime and reimbursements—are now capped. If these allowances exceed the prescribed limit, the excess is automatically reclassified as wages for statutory purposes. This provision effectively prevents aggressive salary splitting and brings greater uniformity in wage computation across sectors.
Impact on salary structures and taxation
The immediate effect of the 50% wage rule is that employers will need to restructure salary break-ups by increasing basic pay and DA. This, in turn, raises statutory contributions linked to wages, including provident fund (PF), gratuity, pension and other social security benefits.
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CA Dr Suresh Surana noted that such restructuring could increase the taxable portion of salary. “The restructuring of salary components to comply with the 50% wage threshold is likely to result in a higher proportion of taxable salary,” he said.
Allowances that were earlier used as tax-efficient components may now be subsumed into wages, potentially leading to a higher gross taxable salary under Section 15 of the Income-tax Act, 1961, increased employer and employee PF contributions due to an expanded wage base, and reduced flexibility for tax optimisation through exemptions.
While employer contributions to recognised provident fund and the National Pension System (NPS) continue to enjoy exemptions under Sections 17(2)(vii) and 80CCD, Surana cautioned that contributions beyond prescribed limits can trigger additional tax liability. “The actual income-tax impact must be analysed case by case, depending on the employee’s salary structure, tax regime, allowance mix and how remuneration is realigned to meet the wage threshold,” he said.
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Why the revised wage definition may still benefit employees
From a longer-term perspective, tax experts argue that the revised wage framework strengthens financial security. CA Niyati Shah, Vertical Head – Personal Tax at 1 Finance, said the broadened wage base increases the amount on which statutory benefits and retirement savings are calculated.
“While take-home pay may appear lower in the short term, the enhanced contribution base accelerates long-term savings through PF and gratuity,” Shah said. “This improves retirement outcomes and can deliver indirect tax efficiency through higher deductions linked to social security contributions.”
In effect, the reform nudges salaried employees towards structured savings without altering overall CTC, helping build a more robust retirement corpus over time.
New tax regime versus old tax regime
The choice between the new and old tax regimes becomes more nuanced after the labour codes’ rollout. The new tax regime offers lower slab rates and a higher rebate threshold but allows very limited exemptions and deductions. The old regime relies heavily on exemptions such as HRA and deductions under Sections 80C and 80D.
Under the new regime, one of the few meaningful benefits that remains is the tax exemption on employer contributions to PF, pension schemes and NPS. As basic pay rises due to the revised wage definition, employer contributions—calculated as a percentage of basic salary—also increase. This results in higher tax-exempt contributions, lowering taxable income even under the new regime while strengthening retirement savings.
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Under the old regime, higher basic pay can have mixed effects. While allowance-based planning may shrink, HRA exemption—linked directly to basic salary, can increase, particularly benefiting employees paying high rents in large cities. For such taxpayers, the old regime may still be more advantageous.
Employers can contribute up to 14% of basic salary to NPS and up to 12% to PF, with a combined tax-exempt cap of Rs 7.5 lakh per year. Contributions beyond this limit are taxable, while interest on employee EPF contributions above Rs 2.5 lakh annually remains taxable and subject to TDS.
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