India’s new labour codes mandate that basic pay and DA must form at least 50% of total CTC, forcing companies to restructure salaries. The change may reduce take-home pay but will increase PF, gratuity and long-term retirement savings from 2026 onward.
One of the most important labour law reforms introduced by the Central Government in 2025 has brought a major change in how salaries and wages are structured for salaried employees across India. From November 21, 2025, all four new labour codes officially came into force.
These include 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.
ALSO READ: Delhi High Court Flags Major Flaw in New Labour Code: ‘Old Acts Not Repealed Yet’
Together, these laws replace several older labour laws and introduce a single, uniform and legally binding system for deciding wages, employee benefits and social security protections.
At the centre of this reform is a new and uniform definition of the term “wages”, which directly affects how salaries are calculated, taxed and linked to retirement benefits.
Under the new rules, wages only include basic pay, dearness allowance (DA) and retaining allowance, wherever applicable. Importantly, these three components together must form at least 50 percent of an employee’s total cost to company (CTC).
All other salary components such as house rent allowance (HRA), bonuses, commissions, incentives, overtime payments and reimbursements are now restricted. If these allowances go beyond the permitted limit, the extra amount will automatically be treated as wages for legal and statutory purposes.
This change puts an end to the common practice of breaking salaries into multiple allowances to reduce tax and statutory contributions. It also ensures that wage calculation is more uniform across industries and job roles.
Because of this 50 percent wage rule, companies will now have to change their salary structures by increasing basic pay and DA.
As many statutory contributions are linked directly to wages, this change will increase both employer and employee contributions towards provident fund (PF), gratuity, pension and other social security schemes.
Chartered Accountant Dr Suresh Surana explained that this restructuring can also affect income tax liability.
He said,
“The restructuring of salary components to comply with the 50% wage threshold is likely to result in a higher proportion of taxable salary,”
Earlier, many allowances were structured in a tax-efficient way. With the new rules, several of these allowances may now be treated as part of wages.
This can lead to a higher taxable salary under Section 15 of the Income-tax Act, 1961, increased PF contributions due to a larger wage base, and less flexibility to reduce tax through exemptions.
Although employer contributions to recognised provident fund and the National Pension System (NPS) continue to receive tax benefits under Sections 17(2)(vii) and 80CCD, Dr Surana cautioned employees to be careful.
He said,
“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,”
Despite the possible short-term impact on take-home salary, tax experts believe that the new wage definition can be beneficial for employees in the long run.
Chartered Accountant Niyati Shah, Vertical Head – Personal Tax at 1 Finance, said that a higher wage base increases the amount used to calculate social security benefits and retirement savings.
“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 practical terms, the reform encourages disciplined and structured savings without changing the overall CTC. Over time, this helps employees build a stronger retirement fund and improves financial security after retirement.
The implementation of the labour codes also makes the choice between the old and new income tax regimes more complex. The new tax regime offers lower tax rates and a higher rebate limit but allows very few exemptions and deductions.
The old tax regime, on the other hand, depends heavily on exemptions such as HRA and deductions under Sections 80C and 80D.
Under the new tax regime, one of the few major benefits still available is the tax exemption on employer contributions to PF, pension schemes and NPS. As basic pay increases due to the revised wage definition, employer contributions also rise because they are calculated as a percentage of basic salary.
This results in higher tax-free contributions, which can reduce taxable income even under the new regime while simultaneously boosting retirement savings.
Under the old tax regime, the effect of a higher basic salary can be mixed. While the scope for allowance-based tax planning may reduce, HRA exemption—which is linked directly to basic pay—can increase.
This can be especially beneficial for employees living in metro cities and paying high rent. For such taxpayers, the old regime may still be the better option.
As per existing rules, employers can contribute up to 14 percent of basic salary to NPS and up to 12 percent to PF, with a combined tax-exempt limit of Rs 7.5 lakh per year.
Any contribution beyond this limit becomes taxable. Additionally, interest earned on employee EPF contributions exceeding Rs 2.5 lakh per year remains taxable and is subject to tax deduction at source (TDS).
Overall, the 2025 labour reforms mark a significant shift in India’s salary and wage framework. While employees may notice changes in take-home pay initially, the long-term focus of the reform is on transparency, uniformity and stronger social security, making it one of the most impactful labour law changes in recent years.
Read More Reports On Rape Case
