New labour codes set to restructure pay, which tax regime should you pick?

Take-home pay may dip temporarily, expect retirement savings to rise

 The rollout of India’s four labour Codes marks a significant shift in labour governance. By simplifying decades-old regulations, the Codes aim to enhance efficiency, consistency, and worker protection. However, both employers and employees will need to adapt to changes in wages, provident fund (PF), gratuity, and so on. 

Impact on employees 

The Codes strengthen worker safeguards through a uniform national minimum wage, timely salary payments (by the 7th of next month), faster full-and-final settlements (within two days), and extended gratuity benefits for fixed-term employees.

“The Codes also restrict contract labour in core activities, promote permanent employment, allow leave encashment beyond 30 days and, importantly, bring gig workers under social security for the first time,” says Alok Agrawal, partner, Deloitte India. 

Impact on salary and CTC 

The new definition of wages brings uniformity across labour Codes. “Key changes include a clearly defined list of exclusions and a formula that treats any excluded components exceeding 50 per cent of total remuneration as part of wages for statutory 

calculations,” says Arjun Paleri, partner, BTG Advaya. 

Employers will have to revisit salary structures. “While wages may not necessarily rise or fall, components like house rent allowance (HRA) and other allowances — now explicitly excluded — will need to be balanced within the 50 per cent cap. Any excess will be added back to wages for PF, gratuity, and other benefits,” adds Paleri. CTC composition, monthly take-home pay, and end-of-service benefits may be affected.   

Take-home salary may go down. “If employers keep overall CTC unchanged, higher statutory contributions will reduce employees’ monthly take-home while boosting their retirement savings. Alternatively, if employers want to protect current net pay, they may need to increase their overall cost to absorb the additional contribution,” he says. 

The Codes also cap total deductions at 50 per cent of wages to protect minimum take-home pay. 

Higher retirement savings 

With a broader definition of wage, PF contributions will be calculated on a larger share of salary for non-excluded employees, helping them build a larger retirement corpus. 

Employees earning above ₹15,000 per month remain “excluded employees” under PF rules, meaning neither they nor their employers are legally required to contribute. “Courts have also allowed PF contributions for such employees to be limited to basic salary, even if some allowances technically fall within “basic wages”. If the government retains these principles in the new Codes, PF contributions for excluded employees may remain unchanged, though the ₹15,000 threshold itself may be revised when the new PF scheme is notified,” says Agrawal. 

Voluntary PF contributions above the statutory minimum will be allowed. “While PF contribution rates are expected to remain the same, the revised definition of wages may increase PF contributions for employees whose PF was earlier calculated only on basic pay. The overall impact will ultimately depend on how employers apply the new wage definition within their payroll structures,” says Paleri. 

Bigger gratuity payout 

Gratuity will now be computed on a broader salary base instead of only basic pay and dearness allowance. This may raise payouts, particularly if one-time or performance-linked pay is not excluded in the final rules. 

“If an employer does not cap gratuity at ₹20 lakh (the earlier statutory limit), many employees may become eligible for higher payouts,” says Agrawal. 

Parity for fixed-term employees 

Gratuity is now payable to these employees after one year of service instead of the earlier five. PF contributions must match those of permanent staff.

 

“With improved portability and Aadhaar-linked systems, fixed-term employees (FTE) can carry their PF and social-security benefits more easily across jobs,” says Sandeep Jhunjhunwala, partner, Nangia Group. 

“The Codes also reinforce equal treatment for FTE and permanent employees, reducing benefit gaps, and creating a more balanced reward structure,” says Pooja Ramchandani, partner, Shardul Amarchand Mangaldas & Co. 

Old or new tax regime? 

Higher basic wages will influence tax outcomes. “Under the old regime, employees may benefit from higher Section 80C deductions (due to increased PF contributions) and possibly larger HRA exemptions. Under the new regime, where most deductions are unavailable, the main issue is whether employer contributions to PF, National Pension System (NPS), and superannuation exceed the ₹7.5 lakh annual cap. Any excess and related interest become taxable,” says Jhunjhunwala. 

Employees should reassess their financial choices. “With a higher basic pay component, employees should re-evaluate whether the old or new tax regime is more advantageous. Those prioritising retirement savings may also consider voluntary PF or NPS contributions,” says Jhunjhunwala. 

Transitional challenges 

Employees should expect several changes. “Offer and appointment letters may be updated to reflect revised wage structures, benefit formulas, working hours, overtime protocols, and night-shift safeguards. Overall CTC is unlikely to reduce, though some employees may see a slight drop in take-home pay due to higher PF contributions. Clear communication from employers on updated policies will be key during this transition,” says Ramchandani. 

“Fixed-term employees should ensure the new one-year gratuity eligibility is correctly applied,” says Jhunjhunwala.

 

 

(The writer is a Delhi-based independent journalist)

 

How the new labour codes may impact your finances

 

Possible reduction in take-home pay: With more components counted as wages, PF and gratuity contributions may rise, reducing monthly take-home

Larger PF contributions and retirement corpus: PF will be calculated on a broader salary base, increasing long-term retirement savings

 

Higher gratuity payouts: Gratuity will be computed on a wider portion of salary, and payouts may rise, especially if employers do not cap them at Rs 20 lakh

 

Faster settlements: Salaries must be paid by the seventh of the following month; final dues must be cleared within two days