New Labour Codes Define ‘Wages’: How This Impacts Your Salary, EPF, Gratuity and Pension

What’s happening

India’s new labour codes have introduced one of the biggest changes to salary structures in decades. The new definition of “wages” will directly affect your basic pay, in-hand salary, provident fund contributions, gratuity payouts and even pension benefits. Workers across all sectors—especially those in MSMEs—will feel these changes as companies begin restructuring salaries to comply with the new rules.

What Has Changed in the Definition of Wages

Under the new labour codes, “wages” now include three main components:

• Basic salary
• Dearness allowance (DA)
• Retaining allowance, if applicable

All other allowances such as HRA, conveyance, special allowance, overtime, bonuses and employer contributions are no longer part of wages.

A key rule now states that wages must make up at least 50% of total CTC. This prevents companies from keeping basic salary very low and loading the package with allowances to reduce statutory benefits.

How This Impacts Your Basic Salary

Because wages must be at least half of your total earnings, many employees will now see their basic pay increase. As a result, allowances may shrink. While the overall CTC may not change, the structure inside your salary slip will be different.

This shift can lead to a slight reduction in monthly in-hand salary, because a higher basic pay means higher PF deductions and higher contributions toward benefits. However, the long-term financial advantages are far greater.

What It Means for EPF and Pension Contributions

With a larger portion of salary now counted as wages, both employer and employee contributions to EPF and the pension scheme will increase. This means a bigger retirement corpus and better long-term financial security.

Employees who had a smaller PF base earlier will now benefit from a stronger savings foundation. Over the years, this can significantly improve pension payouts and total accumulated PF.

Gratuity Becomes More Rewarding

Another major outcome of the new definition is higher gratuity amounts.

Earlier, gratuity was linked to basic pay and DA. Since wages now form a larger section of salary, gratuity calculations will be based on a higher base amount. This leads to bigger payouts for employees completing their service period.

A major relief has also been announced for fixed-term and contract workers. They will now be eligible for gratuity after one year of continuous service, instead of the earlier requirement of five years. This brings contract workers closer to the benefits enjoyed by permanent staff.

Impact on In-Hand Salary: The Trade-Off

For many employees, take-home pay may dip slightly due to higher provident fund contributions and higher gratuity liability on the employer’s side. But the long-term safety net becomes much stronger.

Employees benefit through:

• A bigger PF corpus
• Higher gratuity at the end of service
• Better pension benefits
• Transparent salary structure

The only downside is a slightly lower monthly in-hand amount. But this shift is designed to strengthen financial stability rather than short-term earnings.

How Employers Will Adjust Salary Structures

Companies—especially MSMEs—will need to redesign salary slips and job offer templates. Allowances can no longer dominate pay packages. Payroll systems must ensure wages form at least 50% of CTC, and all statutory contributions must be calculated on this revised base.

This will lead to more standardised and transparent pay structures across industries.

What Employees Should Do Now

To understand how these changes affect you, check your upcoming salary slips closely. Make sure:

• Basic pay is not unusually low
• Allowances do not exceed 50% of your total pay
• PF and pension calculations reflect the new wage structure
• Gratuity is accounted for based on new rules

If you are on a fixed-term contract, check if your HR has added gratuity eligibility after one year of service.

Conclusion

The new labour codes aim to fix long-standing issues in India’s salary systems. While employees may see a slight dip in monthly in-hand pay, the reforms significantly strengthen long-term financial benefits. With bigger EPF contributions, improved pension security and higher gratuity, the new wage definition brings more stability and fairness to the workforce—especially for MSME employees and contractual workers.