New Labour Codes Take Effect, but Old PF Rules Remain — Employers Face Fresh Confusion

The government has finally implemented the long-pending labour reforms by bringing the four new labour codes into effect. These reforms were approved in Parliament years ago, and experts believe the updated rules are more aligned with today’s economic realities. However, keeping the old Provident Fund (PF) rules intact despite introducing new labour codes has created significant confusion for both employers and employees.

According to labour specialists, while the new codes overhaul major areas such as wages, social security, and working conditions, the EPF Act, 1952 continues to remain operational. This mismatch is expected to create challenges when companies restructure employee salaries in compliance with the new laws.

Major Change Under New Wage Code: Basic Salary Must Be 50% of CTC

One of the most impactful provisions comes from the Code on Wages, 2019, which mandates that an employee’s basic salary must be at least 50% of their Cost-to-Company (CTC).
Earlier, companies kept the basic salary portion relatively low to offer higher take-home pay. Since PF deductions are calculated on the basic salary, a lower basic component meant smaller PF contributions and higher monthly salary in hand.

Under the new structure:

• Basic Salary ≥ 50% of CTC

• PF contribution = 12% of basic salary every month

• Higher basic salary → Higher PF deduction → Lower take-home pay

This adjustment will significantly alter salary slips for millions of employees across India.

Significant Overhaul in Gratuity Rules

With the Code on Social Security, 2020, several older laws like the Gratuity Act and the Employees State Insurance Act have been replaced. The biggest benefit comes for fixed-term employees.

Earlier, gratuity was payable only after completing five years of continuous service.
Under the new rules:

• Fixed-term employees become eligible for gratuity after just one year of service.

• Companies can hire employees for fixed durations such as 1 year, 2 years, or 3 years, and these workers will still receive the same gratuity benefits as permanent employees.

This change significantly boosts financial security for contract-based and project-based workers, especially in sectors like IT, manufacturing, and gig platforms.

Why PF Rules Didn’t Change Despite New Labour Codes

Initially, the industry assumed that once the new labour codes were implemented, the EPF Act, 1952 would be merged into the Social Security Code, thereby updating all PF provisions under a single framework.
However, the government has not issued any notification to discontinue the old EPF Act. This means:

• PF rules remain exactly the same

• PF continues to be governed by the EPF Act, 1952

• New labour codes apply only to wages, social security, and working conditions

• PF reforms may be introduced later

Experts believe the government may soon notify updated PF rules to eliminate inconsistencies and ease salary restructuring for companies.

Employers Might Struggle to Restructure Salaries

With the wage code mandating that 50% of CTC should be the basic salary, companies will have to rearrange several salary components. But since PF still follows old rules, this creates a practical challenge.

Companies now have to adjust allowances — such as:

• HRA (House Rent Allowance)

• LTA (Leave Travel Allowance)

• Special allowances

• Other reimbursements

All of these will now need to fit within the remaining 50% of the CTC. This may lead to:

• Reduced HRA and LTA components

• An increase in basic pay

• Higher PF deductions

• A drop in take-home salary for many employees

Experts note that companies are waiting for the government to notify new PF rules so they can implement salary changes smoothly without violating any provisions.