New Labor Codes: PF and gratuity will increase, but the cash flow will decrease... Learn how the new labor code will change the salary structure..

The Indian government on Friday announced the implementation of four labor codes, taking a major step for the country's workers. This decision will take effect on November 21, 2025, and its primary objective is to simplify labor laws and ensure better wages, safety, social security, and welfare for workers.

These four codes include the 'Code on Wages 2019', the 'Industrial Relations Code 2020', the 'Code on Social Security 2020', and the 'Occupational Safety, Health and Working Conditions Code 2020'. This move will streamline 29 existing labor laws and move away from outdated colonial-era systems to align with modern global trends. This new labor code will also change people's salary structures.

What will be the salary changes?
Now, at least 50% of an employee's salary will be basic salary. This rule has been implemented under the 'Code on Wages'. This means that the amount going into the Provident Fund (PF) and Gratuity will increase.

PF and Gratuity are calculated based on the basic salary. When the basic salary increases, the contribution to PF and Gratuity by both the employee and the company will increase. This will increase the amount accumulated for the employee's retirement, but the take-home salary may decrease slightly. This will happen because the total salary (CTC) will remain the same, but the PF and Gratuity component of the CTC will increase.

Companies will have to change their structure.
This new rule came into effect on Friday. However, the government will announce its rules within the next 45 days. After this, companies will have to change their salary structure according to these rules.

Why was this rule introduced?

This rule has been introduced to prevent companies from deliberately keeping basic salaries low and reducing their contribution to PF and gratuity by increasing allowances. Currently, 12% of PF is deducted from the basic salary. The amount of gratuity also depends on the last basic salary and the number of years worked with the company.

What is the expert's opinion?
Suchita Dutta, Executive Director of the Indian Staffing Federation, said that the new labor codes make the definition of wages (salary) uniform under the 'Code on Wages' and 'Social Security'. This will improve gratuity and provident fund, but if companies reduce allowances to reduce expenses, the take-home salary may decrease.

Anjali Malhotra, Partner at Nangia Group, explained that wages will now include basic pay, dearness allowance (DA), and retaining allowance (RA). 50% of total earnings (or any other percentage determined by the government) will be added to 'wages'. This will bring uniformity in the calculation of gratuity, pension, and social security benefits.

How will this differ from the past?
In the past, companies used to keep the basic salary low and distribute the remaining amount as various allowances. This reduced their contribution to PF and gratuity. However, now the government has mandated that at least half of your total salary (CTC) should be your basic salary. This will increase your retirement savings, but may reduce your monthly pay. In a way, this is a good step for your future security, even if it may be a little heavy on your pocket right now.

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