New Labour Code: Here's how salary, allowances, and gratuity will now be determined under the new labor code; a new angle has emerged..
For a long time, there has been confusion in India regarding the salaries, provident fund (PF), and gratuity of salaried employees. This was due to the four new labor codes, which had been enacted into law but whose rules had not been fully implemented. Now, the government has attempted to resolve this confusion to a great extent. The Ministry of Labour has released draft rules and related FAQs under the new labor codes. Through these draft rules, the government has clearly indicated how your salary will be structured in the future, what will be considered as wages, and on what basis gratuity will be calculated.
These changes will affect millions of employees, including salaried individuals, contract workers, and those on fixed-term contracts. Companies will also have to make significant changes to their salary structures and accounting practices.
Until now, the definition of wages has varied across different labor laws in India. In some cases, only the basic salary mattered; in others, the dearness allowance (DA) was included, and in some, the entire salary was considered. For the first time, the new labor codes have established a uniform definition of wages for the entire country, which will apply to all laws. The government believes that this will eliminate confusion and provide greater social security to employees.
Only these components will be included in the salary:
The draft rules state that wages will primarily include basic pay, dearness allowance (DA), and retaining allowance. An important rule has also been added, which is now commonly referred to as the 50 percent rule. According to this rule, the allowance component of an employee's total salary cannot exceed 50 percent.
For example, if your total salary is 60 or 70 thousand rupees, but the basic salary is very low, and the rest of the money is shown as various allowances, the new rule states that half of the salary will be considered as wages. If companies show higher allowances, the amount exceeding 50 percent will automatically be added to the wages. The direct benefit of this will be that PF and gratuity will be calculated on a higher amount. Companies will no longer be able to hide salaries.
Until now, many companies have deliberately kept basic salaries low to reduce the burden of provident fund (PF) and gratuity contributions. This will become difficult under the new rules. This is why the government is calling this change a major step in the interest of employees.
The draft also clarifies which payments will not be considered part of the salary. Performance-linked incentives, ESOPs, variable pay, and expense reimbursements will not be included in the salary. It has also been clarified that leave encashment is not part of the allowances. This has largely resolved the ongoing debate between companies and employees.
Gratuity Rules
The most discussed aspect is the gratuity rules. Under the new system, gratuity will no longer be calculated solely on the basic salary, but on the last drawn salary. Because the definition of salary has now been broadened, employees whose salaries were allowance-heavy may see their gratuity increase automatically.
The draft also clarifies that the new gratuity rule will not be applied retrospectively. This system will be considered effective from November 21, 2025. This means that employees who leave their jobs or retire after this date will receive gratuity under the new rules.
These employees will receive gratuity after one year
A major change has also been introduced for fixed-term and contract employees. According to the new FAQs, fixed-term employees will no longer have to wait five years. If their contract is completed, they will be entitled to gratuity after just one year of service. This change brings relief to millions of employees who work on one or two-year contracts.
For companies, these changes mean increased costs and new accounting responsibilities. Gratuity liability may now be higher, and companies will have to reflect this accurately in their financial statements promptly. If an employee leaves the company after November 21, 2025, the impact of their increased gratuity will be reflected in the accounts for that year.
Higher Salary for Overtime
The draft also includes strict provisions regarding overtime. Double wages will have to be paid for working more than 48 hours a week. Employees cannot be made to work for long periods without breaks, and rest periods will be mandatory. Rules related to medical check-ups for older employees and crèches for children have also been added for certain sectors.
Overall, the new labor codes aim to make the salary system more transparent. While there may not be a significant difference in take-home pay initially, in the long run, provident fund, gratuity, and retirement benefits will be strengthened. Currently, these rules are in draft form and are subject to change after receiving suggestions, but it is certain that the rules regarding salary and gratuity are going to change completely in the future.
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