New labour code: How in-hand salary, wage structure, savings would change from now on

The New Labour Code 2025, rolled out last month, has introduced a clearer and more uniform definition of wages. Under the new rules, an employee’s basic pay, dearness allowance and retaining allowance must together account for at least 50% of the total cost-to-company (CTC). As the government has explained, wages will now be calculated by adding back these components to ensure a consistent base for gratuity, pension and other social security benefits.

While the change may appear technical, it has real implications. It will alter how statutory contributions are calculated, affect the tax deductions employees can claim, and ultimately influence both monthly take-home pay and long-term savings for workers across income levels.

Revised wage structure

According to CA Dr Suresh Surana, the implementation of the new labour codes is expected to significantly reshape salary structures across organisations. This is primarily due to the statutory requirement that at least 50% of total remuneration be treated as “wages” as defined under Section 2(y) of the Code on Wages, 2019, read with the Code on Social Security, 2020. In effect, components traditionally considered fixed pay—such as basic salary, dearness allowance and retaining allowance—must together constitute not less than half of an employee’s total CTC.

For employees whose existing compensation frameworks include a disproportionately higher share of allowances, reimbursements or flexible components, this revision will necessitate a restructuring of salary elements. As a result, the wage component is expected to rise, forming a larger base for mandatory employer and employee social security contributions, including Provident Fund (PF), gratuity and NPS-linked salary elements.

While the overall CTC may remain unchanged, this structural shift could result in:

Higher social security contributions, leading to an increase in long-term retirement corpus;

A potential reduction in immediate take-home salary due to higher employee-side deductions; and

Increased employer liability, particularly for gratuity and PF-linked contributions.

Take-home pay and savings

Dr Surana added that while PF and NPS contributions are likely to rise under the revised definition of wages, take-home pay may fall for some employees.

Under the new framework, social security-linked contributions such as statutory PF, NPS contributions (where applicable), gratuity and other retirement-linked benefits are expected to increase for many employees, especially where existing salary structures do not meet the prescribed 50% threshold. Although this may lead to a visible reduction in monthly in-hand salary, it also supports long-term, tax-efficient retirement wealth creation.

From an employee’s perspective, this transition calls for a balanced financial approach. Higher mandated PF and NPS contributions can provide stable, inflation-adjusted income in retirement. At the same time, employees may need to reassess short-term household spending, review flexible benefit structures, and explore supplementary tax-saving options to optimise their overall compensation.

Over time, enhanced contributions could significantly strengthen an individual’s retirement corpus through the power of compounding. The changes introduced by the new labour codes therefore encourage a more disciplined and structured approach to long-term financial planning.

Employees may consider offsetting the short-term impact by:

Reviewing discretionary allowances and household cash flows;

Aligning voluntary savings and investments with tax-optimisation goals; and

Evaluating whether the old tax regime or the concessional tax regime under Section 115BAC is more beneficial, based on revised salary composition and deduction eligibility.

What the government has said

The labour ministry has sought to allay concerns that the new labour codes will shrink employees’ take-home pay, clarifying that the revised framework does not mandate higher compulsory social security deductions. In an official clarification, the ministry said PF contributions will continue to be calculated on the existing statutory wage ceiling of Rs 15,000, unless employers and employees mutually choose to contribute on a higher amount.

Addressing widespread apprehension, the ministry stressed that mandatory PF deductions will not apply to the full salary, even if allowances form a large portion of compensation. It cited the example of an employee earning ₹60,000 per month, comprising Rs 20,000 as basic pay and Rs 40,000 as allowances. If PF is calculated on the wage ceiling, there would be no change in take-home pay.

In such a case, both the employer and employee would continue to contribute Rs 1,800 each, leaving the employee’s net monthly income unchanged at Rs 56,400.