How Labour Code 2025 will rejig your salary: Here’s how take-home pay, bonus, leave encashment will change

The Labour Code, 2025, which came into force on November 21 last year, is reshaping how salaries are structured across corporate India, with far-reaching implications for employee benefits such as gratuity, provident fund and other social security entitlements. At the heart of the reform is a new, uniform definition of “wages”, under which employers must now treat at least 50 per cent of an employee’s total cost-to-company (CTC) as wages for the purpose of calculating statutory benefits.

Under the revised framework, wages include basic pay, dearness allowance and retaining allowance. If these components together fall short of the 50 per cent threshold, employers are required to add the difference to ensure compliance. The change is aimed at bringing consistency to a system that earlier varied widely across organisations, where companies often kept basic pay low and loaded compensation with allowances to reduce statutory payouts.

CA Niyati Shah, Vertical Head – Personal Tax at 1 Finance, said the redefinition of wages has a direct bearing on several employee benefits. “Wages must now be at least 50 per cent of CTC. Since leave encashment and multiple statutory payouts are linked to wages, this redefinition materially changes employee benefits, even if the headline CTC remains unchanged,” she said.

For employees, the reform does not alter headline CTC figures, but it does change how that compensation is distributed. A larger portion of pay will now go toward statutory contributions such as provident fund and gratuity, strengthening long-term savings and retirement security. The trade-off, however, is a likely dip in monthly take-home pay, especially for those whose salaries were previously structured with a high proportion of allowances.

Shah illustrated the impact using examples that show how leave encashment remains constant despite varying bonus structures, as long as wages are fixed at 50 per cent of CTC. For an employee with a CTC of Rs 10 lakh, annual wages under the new rule stand at Rs 5 lakh.

Whether the bonus is 10 per cent or 25 per cent of CTC, the leave encashment value for 15 days remains rs 20,833. Similarly, for a Rs 15 lakh CTC, wages are pegged at Rs 7.5 lakh, resulting in leave encashment of Rs 31,250, irrespective of bonus levels. At a Rs 24 lakh CTC, wages of Rs 12 lakh translate into a leave encashment value of Rs 50,000 across the board.

These examples underscore a key shift under the new regime: variable pay elements such as bonuses may change the composition of compensation, but statutory-linked benefits are now anchored firmly to a standardised wage base. This provides greater predictability for employees and reduces the scope for aggressive structuring that diluted social security payouts in the past.

The real takeaway for 2026

From an employer’s perspective, the change calls for a recalibration of payroll strategies. Companies that relied heavily on allowances to optimise costs will need to rebalance pay packages, which could marginally increase their statutory outgo over time. However, policymakers argue that the long-term benefits—greater transparency, uniformity and improved social security coverage—outweigh the near-term adjustments.

Summing up the broader impact, Shah said the new code is less about increasing compensation and more about redistributing it fairly. “The Labour Code doesn’t raise CTC, it rebalances it. While some employees may see slightly lower take-home pay due to higher provident fund and gratuity linkage, leave encashment and long-term statutory benefits improve meaningfully. It ensures fairer payouts and nudges employers toward transparent and equitable compensation structures,” she said.