Take-home salary may be reduced due to new labor code: Basic pay now required to be at least 50% of CTC, PF-gratuity contribution will increase; Know details

The central government has merged 29 old labor laws into four new codes. These codes are on wages, industrial relations, social security and safety-health. The wage code has come into effect from 21 November 2025. Under which companies will now have to change the salary structure, in which the basic salary must be at least 50% of the total CTC.

This will increase contributions to provident fund and gratuity, but take-home salary may be affected. Experts say that these changes will provide long-term benefits to the employees, but may increase the burden on the pockets in the short-term.

What are the new labor codes, how are they being implemented?

Earlier there were 29 different labor laws in India, which was confusing. Now these have been consolidated into four codes – Code on Wages (2019), Industrial Relations Code (2020), Code on Social Security (2020) and OSHWC Code (2020). The wage code has become active from 21 November 2025. Detailed rules will be notified in the next 45 days. Under which all companies will have to restructure their salary structure.

The main change in the new codes is that basic salary, dearness allowance and retaining allowance should be 50% of CTC or the government notified %. It standardizes the definition of wages, so that there is consistency in PF, gratuity and pension calculations. Earlier, companies used to increase the allowance by keeping the basic amount low, which reduced the contribution. Now this trick will not work.

Understand with example how take-home salary will be affected.

The new rules may reduce the monthly take-home of employees, as deductions will increase if CTC remains fixed. Suppose someone’s CTC is Rs 50,000. Earlier the basic was 30-40% (Rs 15,000-20,000), so the PF contribution (at 12% basic) would have been Rs 1,800-2,400. Now if you have to pay 50% of basic i.e. Rs 25,000, then PF will become Rs 3,000. Meaning the take-home salary will be reduced by Rs 1,200.

Gratuity will also now be calculated on ‘wages’, in which allowances (except HRA and conveyance) will be added in addition to basic. This will increase the gratuity amount, but this will also come from CTC only. Anjali Malhotra, partner, Nangia Group, said, “Wages now include basic pay, dearness allowance and retaining allowance. 50% total remuneration will have to be added. In such a situation, small and medium employees will be most affected.

How will PF and gratuity contribution increase, what are the benefits?

PF will be 12% on ‘wages’, which was earlier only on basic. Gratuity calculation has also shifted to wages. Fixed-term employees will now get gratuity only after 1 year of service, earlier it used to be 5 years. Universal minimum wages will also come, which will be based on living standards. This will cover all workers in organized and un-organized sectors.

For gig workers (such as delivery boys), companies will have to contribute 1-2% of turnover (capped at 5% of payments). “Gratuity payments will increase as the calculation will be on wages beyond just basic,” said Puneet Gupta of EY India. This will strengthen retirement security in the long term, but companies will try to balance it by reducing the allowance.

Why were these changes brought, what is the government’s plan?

These codes are to modernize the workforce. The earlier lodges were outdated, covering only 30% of the workers. Now uniform wage definition will reduce discrimination. There will be gender equality in hiring and wages. The new law increased the layoff threshold from 100 to 300 workers. Whereas for small factories, relaxation has been given to 20-40 workers. Overtime will be available at double rate. Social security contributions have been made mandatory to support the gig economy.

Suchita Dutta, executive director of the Indian Staffing Federation, said, ‘The new codes unify the wage definition. This will improve retirement security, but if employers reduce the allowance, the take-home salary may reduce. The government’s focus is on digitized compliance – one-license system, randomized inspections and fine compounding.

What burden will there be on employers, what relief will they get?

Companies will have to re-structure salary packages, which may increase labor costs. Higher contribution on PF-gratuity will increase overheads. Gig platforms will have to pay 1-2% turnover. But the relief is that due to decriminalization, the jail sentence will be less and only monetary penalty will be imposed.

Work-from-home has been recognized in the new law. There will be a mutual agreement for flexible hours. Layoffs became easier for larger units. Experts believe that these changes will provide ease to MSMEs, but restructuring will take time for big corporates.

What can happen in the future, how will the employees benefit?

In future, these codes will cover more of the unorganized sector and discrimination will reduce. Appointment letters will become formal with digital compliance. Gig workers will get social security, which will boost the economy. But to balance the impact on take-home, the government can issue CTC adjustment guidelines.

Overall, these codes will strengthen workers welfare, but short-term changes will increase negotiations. If your CTC is up to Rs 24,000, then you will get the benefit of Universal Wage Payment.

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