ET OnlineSocial Security Code’s wage reset: Why salary restructuring may no longer help employers offset higher gratuity and social security costs (AI generated representative image)
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India’s new wage framework resets the employer compliance equation by bringing in key provisions of the Code on Social Security, 2020 into force, the Ministry of Labour and Employment has quietly triggered one of the most significant compensation and compliance shifts Indian employers have seen in decades, with effect from 21 November 2025.
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The notification of the Social Security (Central) Rules, 2026 on 8 May 2026 also sets the tone for the long-awaited procedural and enforcement framework under the Code.
For years, compensation models across industries in India were designed around fragmented labour legislations. Employers optimised cost structures by keeping “basic wages” relatively low while loading compensation through allowances and flexible pay heads.
That framework now stands fundamentally altered.
At the heart of this transition lies the expanded definition of “wages” under Section 2(88) of the Code, which effectively determines major social security benefits, along with another equally important but relatively under-discussed provision: Section 124 .
Together, these provisions send a clear legislative message: employers may have to bear higher social security costs, but they cannot recover those costs by reducing employee wages or benefits.
And that is where the real compliance challenge begins.
The 50% rule could reshape salary structures
The wage definition under the Code on Social Security, 2020 standardises the meaning of “wages” for various social security benefits available to employees and introduces the now well-known “50% threshold”.
While components such as HRA, conveyance allowance and overtime continue to remain excluded, the law provides that where excluded components exceed 50% of total remuneration, the excess amount must be added back into wages.
In effect, the law seeks to prevent excessive fragmentation of salary structures through allowances and variable pay components.
For employers, this has immediate financial implications.
A higher wage base directly impacts:
- provident fund contributions,
- gratuity payouts,
- maternity benefit calculations,
- employee compensation liabilities, and
- other wage-linked statutory obligations.
Industries with historically allowance-heavy compensation structures are therefore likely to witness a significant increase in long-term employee cost exposure. But the larger question is whether these additional liabilities can be avoided or reduced through compensation restructuring. That is precisely where Section 124 of the Code becomes critical.
Section 124 may become one of the most critical provisions under the Code
Section 124 of the Code on Social Security, 2020 restricts employers from reducing employee wages or benefits merely because they are now required to make higher contributions or payments under the Code.
The language of the provision is notably broad. It prohibits both direct and indirect reduction of:
- wages; and
- the “total quantum of benefits” available to employees.
This means regulators and courts are unlikely to examine only the nomenclature used in salary structures. They may instead look at the real intent behind compensation restructuring exercises and their impact on employees’ wages and social security benefits under the Code.
For instance, if an employer redesignates “special allowance”, which may otherwise be required to be included within wages under section 2(88), as “conveyance allowance” or any other excluded component with the objective of offsetting increased statutory liabilities, the question may arise whether such restructuring violates Section 124.
That risk is no longer merely theoretical.
Salary restructuring may face greater regulatory scrutiny
Historically, compensation structuring in India is often focused on tax efficiency and cost optimisation. The new framework, however, shifts the focus towards statutory substance and regulatory intent.
Employers now need to clearly distinguish between:
- legitimate compensation redesign driven by genuine business or organisational needs; and
- restructuring exercises undertaken primarily to reduce or neutralise higher social security liabilities.
That distinction will increasingly matter.
A salary restructuring that leaves employees economically worse off because an employer seeks to offset higher provident fund or gratuity obligations could attract scrutiny from labour authorities.
More importantly, Section 133 of the Code on Social Security, 2020 specifically treats reduction of wages or benefits in contravention of the law as a punishable offence liable to fine.
Non-compliance is no longer just a monetary issue
One of the most striking aspects of the Code on Social Security, 2020 is its strengthened enforcement architecture.
Under Sections 134 and 135:
● Repeat violations may trigger imprisonment,
● Fines can escalate substantially; and
● Directors and officers responsible for the conduct of the company’s business may also face prosecution.
This marks a significant departure from the traditional perception that labour law non-compliance is merely a monetary issue.Compensation structuring decisions may now carry serious governance implications.
A larger shift in India’s labour law philosophy
The Code on Social Security, 2020 reflects a broader policy shift underway in India’s labour law framework.
The legislative intent is becoming increasingly clear:social security obligations are not optional cost variables; andemployee benefits cannot be diluted through restructuring techniques.
The repeal and merger of legacy legislations, such as the Employees’ Compensation Act, 1923, Employees’ State Insurance Act, 1948, Maternity Benefit Act, 1961 and Payment of Gratuity Act, 1972 under the Code signal not merely legislative consolidation but a broader regulatory consolidation backed by stronger enforcement intent.
For employers, the message is straightforward.
The era of aggressively engineered salary structures may gradually give way to one where statutory compliance, employee protection and governance accountability become inseparable.
Section 124 may ultimately emerge as the provision that defines that transition.
As employers revisit compensation models in the post-Code era, Section 124 may increasingly shape the boundaries of lawful salary restructuring. What was once viewed primarily as a payroll design exercise may now evolve into a core compliance and governance issue for corporate India.
The author, O.P. Yadav, is a former IRS officer with over 36 years of experience in tax administration, education, and training. He is presently working with Prosperr.io as a Tax Evangelist. The views expressed are personal.
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