New labour codes: Take-home pay may dip as PF and gratuity rise under unified definition of wages

India is bracing for a major shift in employee compensation as the newly implemented labour codes introduce a unified definition of wages—an overhaul that experts say will strengthen retirement security but could reduce monthly take-home pay for millions of workers. The revised framework, part of the Code on Wages and the Code on Social Security, aims to eliminate long-standing discrepancies in salary structures and prevent employers from under-reporting basic pay for statutory contributions.

Calling November 21 a “landmark date for Indian labour relations”, Atul Gupta, Partner – Labour and Employment Practice at Trilegal, said the rollout marks the replacement of “decades-old laws, many from the British era.” He added, “Old laws stand repealed, and work will begin on the implementation of State-level rules… With no grace period for implementation, organisations will need to take immediate cognisance of the substantive provisions of the Codes, even while they wait for Rules to be formalised.”

Gupta noted that the transition will also introduce changes in grievance redressal mechanisms, union recognition, leave entitlements, and the definition of contract labour.

Wage structuring

Under the new wage provisions, ‘wages’ will include basic pay, dearness allowance and retaining allowance, and employers must ensure that at least 50% of an employee’s total remuneration falls under this category. This shift will directly alter the calculation of provident fund (PF), gratuity and other long-term benefits.

Explaining the change, Anjali Malhotra, partner at Nangia Group, said, “Wages now include basic pay, dearness allowance and retaining allowance; 50% of the total remuneration shall be added back to compute wages, ensuring consistency in calculating gratuity, pension and social security benefits.” This broadened wage base means higher statutory contributions by both employers and employees.

Currently, PF is calculated at 12% of basic salary. With basic pay and allowances now forming a larger portion of ‘wages,’ mandatory PF contributions will rise without an increase in overall CTC—leading to a likely reduction in take-home earnings. However, employees will see stronger long-term savings and higher retirement corpus.

Suchita Dutta, executive director of the Indian Staffing Federation, said the shift aims to unify wage definitions across codes and close loopholes. “This would mean better retirement security through higher gratuity and provident fund but a possible dip in take-home pay if employers restructure allowances downward to offset costs,” she said.

Gratuity payouts are expected to rise significantly. Puneet Gupta, partner, People Advisory Services at EY India, said gratuity will now be calculated on ‘wages’ that include basic salary and all allowances except HRA and conveyance allowance—expanding the base for computation.

While the Code on Wages is already in effect, detailed rules are awaited. As the Centre and states work toward alignment, organisations have been advised to immediately review employment contracts and payroll structures to avoid non-compliance.

Despite transitional challenges, policymakers assert that the unified wage definition will establish a transparent compensation structure, strengthen social security and reduce disparities in employee benefits—ushering in one of India’s most significant labour reforms in decades.