India’s new labour law framework has brought one of the biggest changes to employee compensation structures in decades. Yet, despite the buzz, there have been no major fresh announcements or developments in recent months. The new labour codes are expected to bring in a set of changes to salary structures whenever they are fully implemented across organisations.
While your Cost to Company (CTC) may not change overnight, several salary components are being recalibrated in ways that could affect your take-home pay, provident fund contributions, gratuity benefits and long-term retirement savings.
Here’s a look at five salary components that could see the biggest overhaul under India’s new labour laws, based on what we know so far.
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1. Basic Salary
This is the most significantly impacted component. Historically, many employers kept basic pay relatively low and loaded compensation into various allowances. Under the new wage definition, if excluded allowances exceed 50% of total remuneration, the excess must be added back into wages. As a result, basic salary is expected to form a larger share of compensation structures.
The impact of this might be that higher basic pay may increase statutory benefit calculations while reducing flexibility in salary structuring.
2. Provident Fund (PF)
PF contributions are linked to wages. Since the wage base increases under the revised definition, PF contributions are likely to rise for many employees and employers.
As a result, employees may see a reduction in monthly take-home pay but higher long-term retirement savings.
3. Gratuity
Gratuity is calculated based on wages. With a broader wage base and higher basic salary components, gratuity liabilities and payouts are expected to increase. The reform particularly affects organisations that previously relied heavily on allowances to keep wage-linked liabilities lower.
There will be larger gratuity payouts for eligible employees and higher provisioning requirements for employers.
4. Overtime Pay
The Code on Wages clarifies that overtime calculations are linked to the revised wage definition. A higher wage base directly increases overtime rates because overtime compensation is calculated as a multiple of ordinary wages.
Any work that exceeds 8 hours per day or 48 hours per week is legally considered to be overtime under India’s new labour codes; hence, the employer is required to pay overtime at a rate of at least twice the normal wage for each extra hour.
This means increased overtime costs for employers and potentially higher overtime earnings for employees.
5. Leave Encashment
Leave encashment is another benefit linked to wages. Since the wage base expands under the new definition, leave encashment calculations may also increase, particularly where salary structures previously relied on large allowance components.
It indicates higher leave encashment payouts upon resignation, retirement, or separation.
The biggest misconception about the new labour codes is that they merely change salary structures. However, they redefine the foundation on which multiple employee benefits are calculated. Basic pay, provident fund, gratuity, overtime, and leave encashment are all being recalibrated through a uniform definition of wages.
For employers, this is a long-term workforce cost and compliance transformation. For employees, while take-home pay may reduce in some cases, the trade-off is stronger social security and higher retirement-linked benefits.
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What are the most common misconceptions employees have about the labour code-driven salary overhaul?
One of the biggest misconceptions is that the new wage definition automatically increases an employee’s total salary. However, the change is primarily about how salary components are structured and how statutory benefits are calculated.
Employees often assume that higher basic pay means a higher overall compensation package, whereas in many cases, the total cost to the company remains unchanged and only the composition of salary is revised.
Another common misunderstanding is that the changes reduce take-home pay without any benefit. While a higher wage component may increase deductions towards provident fund and other statutory benefits, it can also lead to higher long-term social security benefits such as gratuity, provident fund accumulations and other wage-linked payouts.
The broader legislative objective of the revised wage definition is to strengthen social security benefits for employees by ensuring that wage-linked statutory entitlements are calculated on a more representative wage base.
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How do the new labour laws affect leave encashment, notice pay and overtime calculations linked to wages?
The revised definition of wages has a direct impact on several employment-related payments that are linked to wages. Since overtime, notice pay, and certain wage-linked statutory payments, including leave encashment where applicable under the Labour Codes and other relevant laws, are calculated with reference to wages, an increase in the wage component can increase the base on which these amounts are computed.
For overtime, the Code on Wages specifically provides that employees working beyond normal working hours are entitled to overtime at a rate not less than twice the normal rate of wages. As a result, where the wage base increases under the new definition, overtime payouts may also increase correspondingly.
“Similarly, notice pay and other wage-linked payments are expected to be calculated on a broader and more uniform wage base than under many earlier salary structures that relied heavily on allowances. However, employers should note that leave encashment provisions may differ depending on whether the individual is covered as a worker under the Labour Codes or is governed by the applicable State Shops and Establishments legislation and other relevant employment laws,” said Rishi Agrawal Ceo and Co-founder of Teamlease Regtech.
This makes it important for organisations to review their pay structures and payroll practices holistically to ensure compliance.
What exactly is the 50% wage rule, and how does it affect salary structures that were previously allowance-heavy?
The 50% wage rule seeks to prevent excessive reliance on allowances for salary structuring.
“Under the Code, if the excluded components of remuneration, such as certain allowances, collectively exceed 50% of total remuneration, the excess amount is deemed to be wages and added back for statutory calculations. Employers can no longer maintain very low basic pay while allocating a disproportionately large share of compensation through allowances,” stated Rishi Agrawal.
For organisations that historically used allowance-heavy salary structures, this may require restructuring compensation so that wages constitute at least 50% of total remuneration. The objective is to create a more uniform and transparent basis for calculating statutory benefits and employee entitlements.
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How does the new definition of “wages” alter the composition of basic pay, allowances and other salary elements?
The Code on Wages introduces a uniform definition of wages across labour legislation, bringing greater consistency to the way employee remuneration is assessed for statutory purposes. Wages include basic pay, dearness allowance (DA), retaining allowance, and any other remuneration components that do not fall within the specifically excluded categories prescribed under the law.
Certain components, such as house rent allowance (HRA), conveyance allowance, employer contributions to the provident fund, and other specified exclusions, are generally kept outside the definition of wages. However, the law places a limit on the extent to which remuneration can be structured through such exclusions. If the aggregate value of excluded components exceeds 50% of total remuneration, the excess amount is deemed to be wages and is added back for statutory calculations.
As a result, organisations that have traditionally relied on allowance-heavy salary structures may need to revisit the composition of employee pay.
In many cases, this could lead to a higher proportion of remuneration being classified as wages, thereby impacting calculations linked to provident fund contributions, gratuity, bonus, and other wage-based statutory benefits, said Rishi Agrawal.
The broader objective is to bring greater standardisation and transparency to salary structures while reducing the scope for artificially lowering statutory obligations through excessive use of excluded allowances.
What should employees check in their salary slips to ensure their employer is complying with the new wage definition?
Employees should first review the proportion of basic pay, dearness allowance and other wage-related components relative to their overall monthly remuneration. If allowances form a disproportionately large portion of compensation, it may be useful to understand how the employer has aligned the salary structure with the wage definition under the new labour code.
Employees should also examine whether provident fund contributions, gratuity calculations and other wage-linked benefits are being computed on the appropriate wage base. Particular attention should be paid to the breakup between basic pay and allowances, as well as any significant restructuring of salary components after implementation of the labour codes.
Ultimately, the focus should not be on a single line item in the payslip but on whether the overall salary structure reflects the principle that excluded components should not exceed the permissible threshold under the wage definition framework.
Disclaimer: This article is intended for informational and educational purposes only and is based on the provisions of India’s labour codes and publicly available information as of the date of publication. The labour codes have not yet been fully implemented across all jurisdictions, and the final impact on salary structures may vary depending on future notifications, state-specific rules, employer policies, and individual employment contracts. Employees should consult their HR department or a qualified legal or tax professional for advice specific to their circumstances. Views expressed by experts are their own.
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