The four labour codes came into force on 21 November 2025, replacing 29 older central labour laws. For most businesses, the biggest practical effect of the new labour codes on payroll is not a new form or register, but a change in how salary itself is measured. A single definition of “wages” now drives provident fund, gratuity, bonus and other statutory amounts.
Add to that the separate increase in the EPF wage ceiling to ₹25,000 from 17 September 2026, and many salary structures designed around a low basic pay now need a fresh look. This guide explains what has changed, shows the impact with a simple example and sets out a sensible plan for employers.
Key takeaways
- “Wages” means basic pay, dearness allowance and retaining allowance; most other allowances are excluded, but only up to 50% of total remuneration.
- If excluded components exceed 50%, the excess is added back to wages, which raises the base for PF and gratuity.
- The EPF wage ceiling moved from ₹15,000 to ₹25,000 from 17 September 2026, bringing more employees into mandatory coverage.
- Fixed-term employees become eligible for gratuity after one year of continuous service.
- Full and final settlement is due within two working days of exit, and monthly wages by the 7th of the following month.
The single definition of wages and the 50% rule
Under the Code on Wages 2019 (and the matching definitions in the other codes), wages include basic pay, dearness allowance and retaining allowance. Items such as house rent allowance, conveyance, statutory bonus, overtime, commission and the employer’s contribution to PF are excluded.
The important proviso is the 50% cap. If the excluded items together exceed half of the total remuneration, the amount above 50% is treated as wages. In simple terms, at least half of an employee’s pay must count as wages for statutory calculations, whatever the components are called.
Structures where basic pay was 30–40% of gross, with a large special allowance, are the ones most affected.
Worked example: the effect on one salary
Consider an employee with a monthly gross salary of ₹50,000.
| Component | Before review | Under the 50% rule |
|---|---|---|
| Basic pay | ₹15,000 | ₹15,000 |
| HRA | ₹12,000 | ₹12,000 |
| Special allowance | ₹23,000 | ₹23,000 |
| Excluded items (HRA + special) | ₹35,000 (70%) | Capped at ₹25,000 (50%) |
| Wages for statutory purposes | ₹15,000 | ₹25,000 |
| Employer PF at 12% | ₹1,800 (if restricted to old ceiling) | ₹3,000 |
| Gratuity accrual per year (15/26 of monthly wages) | about ₹8,654 | about ₹14,423 |
The gross salary is unchanged, but the statutory base has risen by ₹10,000. If CTC stays fixed, the employee’s take-home pay falls slightly because their own PF deduction increases, while the retirement benefits build up faster. Employers should check the latest EPFO guidance on how the new wage definition interacts with PF computation for their specific structure.
PF: the new ₹25,000 ceiling
Separately from the codes, the EPF wage ceiling has been raised to ₹25,000 per month with effect from 17 September 2026. Practical points for payroll teams:
- Employees earning up to ₹25,000 are now mandatorily covered under EPF, EPS and EDLI.
- The employer’s 12% contribution is split between EPS (8.33%, on wages up to the ceiling) and EPF, so EPS on a ₹25,000 ceiling comes to about ₹2,083 a month.
- September 2026 needs a split calculation for the days before and after 17 September, filed in a single ECR.
- Employees already contributing on higher wages under existing arrangements can generally continue.
Gratuity under the new labour codes
The gratuity formula of 15 days’ wages for each completed year, and the tax exemption limit of ₹20 lakh, remain. What changes is:
- The base. Gratuity is calculated on wages as now defined, so a higher wage base means higher gratuity. There is no ceiling on the wage used for gratuity.
- Fixed-term employees. They qualify on a pro-rata basis after one year of continuous service, instead of five.
- Accounting. The actuarial liability for gratuity (under Ind AS 19 or AS 15) should be revalued, and the impact may need disclosure in the financial statements.
Payment timelines and paperwork
The codes also tighten several operational points that affect the payroll calendar:
- Monthly wages must be paid by the 7th of the following month.
- Full and final settlement on resignation, termination or retrenchment must be made within two working days of the last working day. This often requires changes to clearance and approval workflows.
- Appointment letters are required for every employee.
- Overtime is payable at not less than twice the ordinary rate of wages.
State rules are still being notified in phases. Where final state rules are pending, existing registers and returns generally continue until replaced, so it is sensible to track your State’s labour department updates.
A practical plan for employers
- Run a salary audit. List every employee’s components and test the 50% rule. Flag anyone whose wages increase.
- Quantify the cost. Estimate the extra employer PF, EDLI and admin charges, and the higher gratuity provision.
- Decide on the approach. Either absorb the higher employer cost or restructure CTC transparently. Communicate clearly with employees about take-home pay and the benefit of higher retirement savings.
- Update payroll software for the new wage definition and the ₹25,000 ceiling, including the split September calculation.
- Revise exit processes to meet the two-day settlement timeline.
- Refresh documentation: appointment letters, salary structure policies and HR handbooks.
A clean month-end process makes these changes easier to absorb; our month-end close checklist includes payroll and statutory accruals. For TDS on salary, see our TDS rate chart for FY 2026-27.
Frequently asked questions
Do the new labour codes require basic pay to be 50% of salary?
Not exactly. They require that excluded allowances do not exceed 50% of total remuneration; anything above that is treated as wages. Many employers simply raise basic pay to meet the test.
Will employees’ take-home pay reduce?
If CTC stays the same and wages rise, the employee’s PF deduction increases, so take-home pay may reduce slightly, while retirement savings and gratuity increase.
When do fixed-term employees get gratuity?
After one year of continuous service, on a pro-rata basis.
How soon must final dues be paid after an employee leaves?
Within two working days of the last working day, under the Code on Wages.
If you would like help reviewing salary structures, updating payroll for the new codes or revaluing gratuity, our payroll team is happy to help.
This article is general information based on the law as of September 2026, and is not legal or tax advice. Please check the facts of your own case with a professional before acting.