How the New Labour Code’s 50% wage rule could cut tax, tweak your monthly take-home pay

The New Labour Code 2025, which came into effect last month, has reshaped how salaries are structured. Under the new rules, basic pay, dearness allowance and retaining allowance must together make up at least 50% of an employee’s CTC. The government says this uniform formula will make calculations for gratuity, pension and other social-security benefits more consistent.

While it may look like a backend policy shift, the impact will be very real for employees. Statutory contributions will change, tax deductions will shift, and both take-home pay and long-term savings may look different depending on the salary bracket.

Chartered Accountant Dr. Suresh Surana explained that the new definition of “wages,” as provided under Section 2(y) of the Code on Wages, 2019 and the Code on Social Security, 2020, requires that components such as basic pay, dearness allowance, retaining allowance and 15% of non-cash benefits together constitute at least half of total CTC.

This change doesn’t just alter how salaries are structured—it also affects the tax benefits employees can claim. With a larger portion of salary now counted as wages, eligible deductions linked to PF, NPS and gratuity calculations will also rise.

Surana noted, “Employer contributions to NPS, deductible under Section 80CCD(2), may increase proportionately and continue to remain one of the few tax-effective components under both tax regimes.”

For employees opting for the old tax regime, he added that higher PF contributions can help fully utilise the Section 80C limit of Rs 1.5 lakh, while voluntary NPS contributions may provide additional tax savings under Sections 80CCD(1B) and 80CCD(2).

He further highlighted: “The alignment of employer contributions to the National Pension System (NPS) with the revised wage definition under the Labour Codes presents a valuable opportunity for tax optimisation. Contributions made by employers to employees’ NPS Tier-I accounts are tax-exempt under Section 80CCD(2) of the Income-tax Act, 1961, up to 10% of salary (or 14% under the new tax regime). However, such contributions—together with employer payments to NPS, superannuation funds and recognised provident funds—are subject to a combined annual tax-exempt ceiling of Rs 7.5 lakh. Any excess is treated as a taxable perquisite.”

Tax implications

According to Surana, both employers and employees should take a structured approach to maximise benefits without breaching tax limits:

Employers may consider adjusting compensation so PF and NPS contributions stay optimally balanced within the Rs 7.5 lakh cap, particularly for senior or high-income staff.

Employees can enhance retirement savings through voluntary NPS contributions under Section 80CCD(1B), which offers an additional deduction of Rs 50,000 under the old regime. This benefit is independent of employer contributions and does not fall under the Rs 7.5 lakh ceiling. Employees must still evaluate which tax regime suits them best.

How much tax can be saved under the new tax regime?

Under the new labour codes, employers are expected to restructure salary packages so that wages --primarily basic pay and DA -- account for at least 50% of CTC. As wages rise, PF, NPS and gratuity automatically rise too. This boosts retirement savings and can lower taxable income, especially under the new regime.

If companies choose not to restructure, wages remain lower and the tax impact is minimal. But once they do, employees benefit from higher employer PF and NPS contributions, which are among the most tax-efficient components today.

A higher basic salary leads to:

> Provident Fund (PF): Both employer and employee contributions increase.

Employee PF reduces taxable income only under the old regime and only up to the Rs 1.5 lakh Section 80C cap.

Employer PF remains tax-friendly under both regimes up to the combined annual ceiling of Rs 7.5 lakh (PF + NPS + superannuation).

> National Pension System (NPS)

When linked to a percentage of basic pay, a higher basic means a larger employer contribution.

Under the new regime, employer NPS contributions are deductible up to 14% of basic pay (within the same Rs 7.5 lakh combined limit).

The employee’s own NPS deduction under Section 80CCD(1B) stays capped at Rs 50,000; increasing basic pay does not expand this benefit.

Overall, restructuring increases the share of tax-efficient components in CTC and reduces taxable income—most noticeably for those in the new tax regime.

Here's how this plays out for CTC levels of Rs 15 lakh, Rs 20 lakh and Rs 25 lakh.

CTC Rs 15 lakh

Annual tax saved after restructuring: Rs 75,871

However, employee PF contribution also rises, reducing monthly take-home pay by about Rs 4,380.

CTC Rs 20 lakh

Annual tax saved after restructuring: Rs 25,634

The higher PF contribution lowers the monthly take-home salary by around Rs 12,134.

CTC Rs 25 lakh

Annual tax saved after restructuring: Rs 40,053
Monthly take-home may reduce by roughly Rs 14,500 because of increased employee PF.