Impact of new Labour Codes: What changes for salary, PF, gratuity

Cuts in take-home salary may boost long-term savings of salaried people, say experts

With companies realigning pay structures, the impact of new Labour Codes is shifting from policy to pay slips. Early adjustments in April suggest a dip in monthly take-home pay, while long-term retirement benefits — such as gratuity and provident fund — rise under the revised wage definition.

 

The codes have a new definition of “wages”, mandating that basic pay and dearness allowance together make up at least 50 per cent of total compensation. This shifts salary structures away from allowance-heavy formats that many companies have historically used.

 

Salary structure

“For a Rs 12 lakh cost to company (CTC) employee, earlier structures often had basic at around 30-35 per cent. Under the new regime, this must move to roughly Rs 6 lakh, which means allowances shrink and the base for PF, gratuity and bonus expands,” said Niyati Shah, chartered accountant and vertical head for personal tax at 1 Finance.

 

 

“The immediate implication is not a change in CTC but a redistribution: Lower cash components and higher retirement-linked accruals. This is less a salary cut and more a structural reallocation from consumption to long-term savings.”

 

Amrita Tonk, partner at CMS INDUSLAW, said the codes change salary structure. “By capping allowances at 50 per cent of wages, it dismantles allowance-heavy pay structures. Any excess components such as HRA or special allowances will be treated as wages for the limited purpose of calculating statutory payments like PF and gratuity,” she said.

 

Ritika Nayyar, partner at Singhania & Co., noted that “the new salary structure must now have a basic salary component of at least 50 per cent,” resulting in companies having little room to structure pay.

 

Take-home pay may fall, but savings rise

Employees’ monthly take-home salaries will likely decrease, as PF contributions rise with higher basic pay.

 

“For mid-income employees in the Rs 8-15 lakh CTC range, the reduction in monthly take-home is typically in the range of 5-10 per cent, which could translate to Rs 5,000-Rs 8,000 per month in some cases,” Shah said.

 

Tonk expected a similar range. “With the expansion of the base on which PF is calculated, take-home pay could reduce by 5–10 per cent due to higher employer and employee contributions, though this will improve long-term financial security,” she said.

 

The impact may vary though. Nayyar noted that “employees can expect a drop in the range of Rs 1,000 to Rs 3,000 depending on their annual CTC and PF structure,” highlighting that outcomes depend on existing salary design.

 

Over time, the trade-off works in favour of savings. “Over a 20-year horizon, this compounding effect can translate into a materially higher corpus, often 20–30 per cent more than under legacy structures,” Shah said.

 

Who gains the most

The changes are particularly significant for certain categories of workers.

 

“The biggest beneficiaries are fixed-term and contractual employees, who now become eligible for gratuity after just one year of service, compared to the earlier five-year threshold,” Shah said.

 

Nayyar added that “contractual and fixed-term employees can now receive pro-rata gratuity after just one year, while employees with historically low basic salaries are also likely to gain due to the increase in the basic component.”

 

For long-tenured employees, the benefit compounds further. “Since gratuity will be calculated on a higher base, payouts will be higher and can translate into a substantial amount at the time of exit,” Tonk said.

 

However, not everyone benefits equally. “Employees already on a 50 per cent basic structure or those leaving before completing five years may see limited impact,” Nayyar noted.

 

What employees should do now

Experts advise employees to actively reassess their finances and compensation structure.

 

“Employees must understand the revised salary breakup and recalibrate monthly budgets, especially if take-home falls by 5–10 per cent,” Shah said, adding that the shift should be viewed as “a move towards structured wealth creation rather than discretionary savings.”

 

Tonk suggested engaging with employers. “Employees may consider discussions for restructuring CTC to include flexible components like performance-linked incentives to balance reduced take-home pay,” she said, while also highlighting the benefit of lower taxable income due to higher PF contributions.

 

Nayyar emphasised the need for monitoring changes closely. “Employees should review their new salary structure, assess the impact on take-home pay and factor this into their monthly budgeting, while also tracking higher PF contributions,” she said.

 

In effect, the reform forces a trade-off: less liquidity today in exchange for stronger financial security tomorrow—a shift that could redefine how Indian employees think about their pay packets.