The Labour Codes and your salary
The four Labour Codes came into force on 21 November 2025. The change that reaches everyone's salary slip is the definition of wages: basic pay and DA must make up at least half of total pay, which raises PF and gratuity and can lower monthly take-home at the same CTC.
Published 2026-09-23 · Last checked 2026-09-23 · 4 min read
What changed
The four Codes — on wages, industrial relations, social security, and occupational safety — replaced a long list of older laws when they came into force on 21 November 2025. Most of what they do is structural, but one definition reaches every salary slip.
“Wages” now means basic pay, dearness allowance and retaining allowance. Allowances outside that — house rent allowance, conveyance, special allowance — may not exceed half of total pay; anything above that is added back into wages for the purposes of the law.
In plain terms: basic pay must be at least 50% of what you are paid. Employers that kept basic low and the special allowance high have had to restructure.
Why that changes your payslip
Provident fund and gratuity are both percentages of wages, not of gross pay. Raising basic raises both.
Your PF contribution is 12% of basic. Your employer adds another 12%, of which 8.33% of wages up to ₹15,000 — at most ₹1,250 a month — goes to the pension scheme rather than your PF balance. Gratuity accrues at 15 days of wages for each year of service, about 4.81% of basic.
When the CTC stays the same, more of it goes into these funds and less arrives in your bank account each month. The money is not lost — it is in your PF and your future gratuity — but the monthly figure falls.
A worked example
Take a ₹20 lakh CTC. With basic at 50%, basic is ₹10 lakh a year. The employer's PF is ₹1.2 lakh and gratuity accrues at about ₹48,000, so gross salary is about ₹18.32 lakh. Your own PF takes ₹1.2 lakh out of that, professional tax ₹2,500, and income tax under the new regime about ₹1.57 lakh, leaving roughly ₹1.29 lakh a month.
Had basic been 30% of CTC, as it often was before, PF and gratuity would have been calculated on ₹6 lakh instead of ₹10 lakh. About ₹96,000 less would have gone into the funds each year — close to ₹8,000 a month more in hand, and correspondingly less saved.
Neither structure is better in itself. The first is more retirement saving and a smaller monthly cheque; the second is the reverse.
Gratuity after one year for fixed-term staff
The second change worth knowing is in the Code on Social Security. A permanent employee still needs five years of continuous service to qualify for gratuity, but a fixed-term employee now qualifies after one year, pro rata.
The formula is unchanged: last drawn monthly wages × 15 ÷ 26 × years of service, with a part-year of more than six months counted as a full year. The statutory ceiling is ₹20 lakh, and for private-sector employees gratuity up to that amount is tax-free across a career.
Because the wage base is higher under the new definition, the same years of service now produce a larger gratuity for many people.
The same CTC, three different payslips
The clearest way to see the rule is to hold the CTC still and move basic pay. These are ₹20 lakh CTC, gratuity inside the CTC, PF on full basic, new tax regime:
| Basic as % of CTC | Into PF each year (you + employer) | Gratuity accrued | In hand per month |
|---|---|---|---|
| 30% | ₹1,44,000 | ₹28,846 | ₹1,37,769 |
| 40% | ₹1,92,000 | ₹38,462 | ₹1,33,551 |
| 50% (the Codes' floor) | ₹2,40,000 | ₹48,077 | ₹1,29,332 |
Where the missing money went
Moving from 30% to 50% basic costs about ₹8,400 a month in hand — roughly ₹1 lakh a year. None of it is lost.
About ₹48,000 a year is your own PF contribution, which is your money earning the EPF rate. Another ₹48,000 is your employer's contribution to PF and the pension scheme. Around ₹19,000 more accrues as gratuity, payable when you leave. Income tax actually falls slightly, because the employer's PF is not salary in your hands.
Whether that trade is good depends on your situation. Someone paying rent and an EMI on a tight monthly budget feels the ₹8,400; someone who was saving that money anyway has simply moved it into a tax-favoured account.
What else the Codes bring in
Beyond wages, the Codes consolidate a long list of older laws. The parts most likely to touch an ordinary employee:
- Appointment letters: employers must issue one, with terms in writing.
- Final settlement: dues on leaving are to be paid within two working days.
- Overtime: paid at twice the ordinary wage rate, now calculated on the wider definition of wages.
- Gig and platform workers: brought into social security for the first time, with aggregators contributing.
- Women may work night shifts in any establishment, with consent and safety arrangements.
What to check on your own payslip
Three lines tell you where you stand:
- Basic pay (with DA) as a share of gross — it should now be at least half.
- The PF deduction — 12% of basic, or 12% of ₹15,000 if your employer uses the wage ceiling.
- Whether gratuity appears in your CTC. Many employers include it, but it is only paid when you leave.
Common questions
- Will my take-home pay fall?
- It can, if your employer raised basic pay while keeping the CTC the same, because PF and gratuity are calculated on the higher basic. The amount leaving your pay goes into your own PF balance rather than disappearing.
- Does a higher basic mean more tax?
- Not directly — income tax is on your salary, not on how it is split. It can change indirectly: your own PF counts towards the ₹1.5 lakh Section 123 deduction under the old regime, and HRA exemption is calculated on basic.
- I am on a fixed-term contract. When do I get gratuity?
- After one year of service, pro rata, under the Code on Social Security. Before the Codes, fixed-term employees usually received nothing unless they completed five years.
Tools for this
Where these rules come from
This guide explains rules as they stood on 2026-09-23; rules change, and how they apply depends on your circumstances. It is not tax, financial or legal advice. See the disclaimer.