New labor code may reduce take-home salary:Basic pay must now be at least 50% of CTC, PF-Gratuity contribution will increase; Know details

The central government has merged 29 old labor laws into four new codes. These codes are on Wages, Industrial Relations, Social Security, and Safety-Health. The Wage Code has come into effect from November 21, 2025. Under this, companies will now have to change their salary structure, where the basic salary must be at least 50% of the total CTC. This will increase contributions to Provident Fund and Gratuity, but the take-home salary might decrease. Experts say that these changes will provide long-term benefits to employees, but in the short-term, they might increase the burden on their pockets. What are the new labor codes, and how are they being implemented? Previously, there were 29 different labor laws in India, which were confusing. Now, these have been consolidated into four codes Code on Wages (2019), Industrial Relations Code (2020), Code on Social Security (2020), and OSHWC Code (2020). The Wage Code has become active from November 21, 2025. Detailed rules will be notified in the next 45 days. Under this, all companies will have to restructure their salary structure. The main change in the new codes is that Basic Salary, Dearness Allowance, and Retaining Allowance combined should constitute 50% of the CTC or the Government notified percentage. This standardizes the definition of wages, bringing consistency to PF, Gratuity, and Pension calculations. Previously, companies used to keep the basic salary low and increase allowances, which reduced contributions. Now, this trick will not work. Understand with an example With the new rules, employees’ monthly take-home salary might decrease, as deductions will increase if CTC remains fixed. Suppose someone’s CTC is ₹50,000. Earlier, if the basic was 30-40% (₹15,000-20,000), the PF contribution (at 12% of basic) would be ₹1,800-2,400. Now, the basic will have to be 50%, i.e., ₹25,000, so PF will become ₹3,000. This means the take-home salary will decrease by ₹1,200. Gratuity will now also be calculated on ‘wages’, which will include allowances (excluding HRA and conveyance) in addition to basic. This will increase the gratuity amount, but it will also come from CTC. Anjali Malhotra, Partner at Nangia Group, said, ‘Wages now include basic pay, dearness allowance, and retaining allowance. 50% of the total remuneration will have to be added.’ In such a scenario, small and medium-sized employees will be most affected. How will PF and Gratuity Contribution increase, what are the benefits? PF will be 12% on ‘wages’, which was earlier only on basic. Gratuity calculation has also shifted to wages. Fixed-term employees will now receive gratuity after only 1 year of service, earlier it took 5 years. Universal minimum wages will also be introduced, which will be based on living standards. This will cover all workers in the organized and unorganized sectors. Companies will have to contribute 1-2% of their turnover for gig workers (like delivery boys) (capped at 5% of payments). Puneet Gupta of EY India said, ‘Gratuity payments will increase because the calculation will be based on wages beyond just basic.’ In the long term, this will strengthen retirement security, but companies will try to balance it by reducing allowances. Why were these changes brought, what is the Government’s plan? These codes are meant to modernize the workforce. Previously, laws were outdated, covering only 30% of workers. Now, discrimination will be reduced with a uniform wage definition. Gender equality will come in hiring and wages. With the new law, the layoff threshold has increased from 100 to 300 workers. Meanwhile, relaxation has been given for small factories up to 20-40 workers. Overtime will be paid at double the rate. To support the gig economy, social security contribution has been made mandatory. Suchita Dutta, Executive Director of the Indian Staffing Federation, said, ‘The new codes unify the definition of wages. This will improve retirement security, but if employers reduce allowances, take-home salaries may decrease.’ The government’s focus is on digitized compliance – a one-license system, randomized inspections, and fine compounding. What burden, what relief will employers get? Companies will have to re-structure salary packages, which may increase labor costs. Higher contributions to PF-gratuity will push overheads up. Gig platforms will have to contribute 1-2% of their turnover. But the relief is that decriminalization will reduce jail sentences, with only monetary penalties being imposed. Work-from-home has been recognized in the new law. Meanwhile, there will be a mutual agreement for flexible hours. Layoffs have become easier for large units. Experts believe that these changes will ease MSMEs, but large corporates will take time for restructuring. What could happen in the future, how will employees benefit? In the future, these codes will cover the unorganized sector more and discrimination will decrease. Digital compliance will formalize appointment letters. Gig workers will get social security, which will boost the economy. However, to balance the impact on take-home pay, the government may issue CTC adjustment guidelines. Overall, these codes will strengthen worker welfare, but short-term changes will increase negotiations. If your CTC is up to 24,000 rupees, you will benefit from universal wage payment. ​