Major changes are coming to the salary structure of working people. New clarity has emerged on certain rules related to salaries, allowances, and terminal benefits, which could impact the monthly earnings and future financial security of working individuals.
Add informalnewz.com as a Preferred Source
New Labor Code: Confusion has long existed regarding salaries, PF, gratuity, and allowances for working people in India. This is especially true since the central government passed four new labor codes, but their rules have yet to be fully implemented. Now, a significant step has been taken in this direction. On Wednesday, the Labor Ministry pre-published draft rules under the new labor codes and also issued FAQs. Through these draft rules, the government has attempted to clarify how salaries will be calculated under the new system, including the definition of wages, the 50% rule, and the basis for calculating gratuity.
This structure will directly impact the salary structures of millions of salaried employees, contract workers, and companies.
What are the new labor codes and why are they important?
The central government has consolidated 29 old labor laws into four new labor codes. These include the Code on Wages, the Industrial Relations Code, the Social Security Code, and the Occupational Safety, Health and Working Conditions Code. The government claims that the purpose of these codes is to simplify labor laws, establish uniform definitions, and provide greater social security to employees.
Until now, different laws had different definitions of wages. Some considered basic salary, some considered DA, and some considered total salary. For the first time, the new labor codes establish a uniform definition of wages, which will apply to all four codes.
Why were the draft rules pre-published?
The Ministry of Labor has released draft rules under the new labor codes for public consultation. Stakeholders have been given a 45-day opportunity to submit suggestions and objections, compared to 30 days for the Industrial Relations Rules.
The government has also clarified that during the transition period, the old rules will remain in force until the new rules are formally notified, provided they are not against the new codes.
What does the new definition of “salary” mean?
The definition of “salary” under the new labor codes is one of the most significant changes. The government’s draft clarifies that allowances will include basic pay, dearness allowance (DA), and retaining allowance.
In addition, an important rule has been added, commonly known as the 50% rule. According to this, if salary and other payments constitute more than 50% of an employee’s total salary, the amount above 50% will be added to allowances.
This means that companies will no longer be able to avoid statutory obligations by setting too low a basic salary and too high an allowance. This will benefit PF and gratuity.
Understand the 50% allowance rule with a simple example.
Suppose an employee’s total monthly salary is ₹76,000. Of this, basic pay and DA together amount to ₹20,000. The remaining amount is paid as various allowances.
According to the new rule, allowances will only be allowed up to 50% of the total salary, i.e. ₹38,000. If the item exceeds this amount, the excess amount will be added to the allowance.
In this example, if the allowance is ₹40,000, ₹2,000 will be considered additional, and when added to the basic pay and DA, the new salary will be ₹22,000. PF, gratuity, and other statutory payments will be calculated on this basis.
Which payments will not be included in salary?
The draft also clarifies that certain payments will not be considered part of salary. These include performance-based incentives, ESOPs, variable pay, and reimbursement-based payments.
Furthermore, leave encashment is not considered part of allowances. This clarification was necessary because there was considerable confusion regarding this between companies and employees.
What will change in gratuity calculation?
Gratuity is one of the most discussed topics in the new labor codes. The reason is clear: gratuity is a benefit received in lump sum after a long period of service and plays a major role in retirement planning.
The draft rules and FAQs clarify that gratuity will now be based on “last drawn wages,” not just basic salary. And since the 50% rule will apply in the definition of wages, the gratuity amount may automatically increase.
This means that for those employees whose salary structure was earlier item-heavy, the gratuity base will increase.
When will gratuity be implemented?
A major question was whether the new gratuity system would be prospective or retrospective. The draft clarifies that the new gratuity provision will be applicable from November 21, 2025, the effective date of the Code.
This means that employees who leave their jobs on or after November 21, 2025, will receive gratuity under the new system.
When will gratuity be paid?
Under the new system, gratuity will be payable in the following situations: termination of employment, retirement, resignation, death or permanent disability, termination of a fixed-term contract, and other cases notified by the central government.
Completing five years of service will not be required in certain cases, such as death, disability, or termination of a fixed-term employment.
A major change for fixed-term employees
An important point revealed in the FAQs issued by ICAI is that fixed-term employees will now be eligible for gratuity after one year of service.
Previously, five years of continuous service was required for gratuity, but now this requirement will not apply to fixed-term employees. This change is especially a relief for millions of employees who work on a contract or fixed-term basis.
What will be the impact on companies?
The new wage definition and gratuity rules will impact not only employees but also companies’ costs and accounting.
According to ICAI, the new system will increase gratuity liability, and companies will be required to reflect it in their financial accounts in a timely manner. If an employee leaves the job after November 21, 2025, the increased gratuity liability will have to be recognized in the accounts for that period.
What will change regarding overtime? Double wages for working more than 48 hours.
The draft rules also include important provisions regarding overtime. Employees will be paid double wages for working more than 48 hours a week. Furthermore, they will not be allowed to work for more than 10 consecutive days, and a mandatory rest day will be provided in lieu of this.
Provisions also include annual medical checkups for employees over 40 years of age in certain sectors, a minimum crèche allowance of ₹500 per child if a crèche facility is not available, and a travel allowance for inter-state migrant workers.
What does this mean for employees?
Simply put, the new labor codes are an attempt to make salaries more transparent. A significant portion of your salary will now be reflected in wages, which will increase social security benefits like PF and gratuity.
However, one aspect of this is that take-home pay may not see a significant change immediately, as companies may redesign salary structures. But in the long run, retirement and terminal benefits will be stronger.
Currently, these rules are in the draft stage and may be subject to changes based on suggestions. However, it is certain that once the new Labor Code is implemented, the old thinking regarding salaries, wages, and gratuity will be completely transformed. It is important for employees to understand their payslips and salary structure and understand what benefits or changes they may experience under the new system.
