Salary structure under the labour codes: the 50% wage rule

Key facts

• The four labour codes are in force from 21 November 2025. They use one definition of wages for PF, ESI, gratuity, bonus and minimum wages.
• Wages = basic pay + dearness allowance + retaining allowance.
• Allowances such as HRA, conveyance, overtime, commission and bonus are excluded, but if the excluded items exceed 50% of total pay, the excess is added back to wages. In practice, basic + DA should be at least 50% of the pay package.
• This raises PF and gratuity for employees whose basic was kept low.

Sample monthly structure (gross ₹50,000)

PF on this: employer 12% and employee 12% on wages up to the ₹25,000 ceiling (from 17 September 2026) = ₹3,000 each. Of the employer's share, 8.33% (₹2,083) goes to EPS and the rest (₹917) to EPF.

ESI does not apply, as gross wages exceed ₹21,000 a month.

Professional tax: as per state slab (for example ₹200 a month in many states).

Other changes for employers

• Gratuity for fixed-term employees after 1 year of service (5 years for others continues).
• Wages must be paid by the 7th of the next month (monthly wage period), and full and final settlement within 2 working days of exit.
• Appointment letters are compulsory for every employee.

Income tax angle

• Under the new regime, most allowances are taxable; the standard deduction is ₹75,000. Employer's NPS contribution up to 14% of basic + DA is deductible.
• Under the old regime, HRA exemption depends on basic, so a higher basic can also increase the HRA exemption.

Common questions

Does the 50% rule reduce take-home pay?

It can, slightly, because PF deduction goes up when basic rises. If PF is capped at the ₹25,000 ceiling, the impact is limited.

Do I have to restructure existing salaries?

Yes, for compliance. Where allowances exceed 50%, either restructure or calculate PF and gratuity on the added-back wages.

Sources

• Code on Wages, 2019 (in force from 21 Nov 2025)
• Code on Social Security, 2020 (in force from 21 Nov 2025)
• Employees' Provident Fund Organisation: contribution rates and wage ceiling
• Income-tax Act, 2025