New Labour Codes to Reduce Take-Home Salary: Here’s How Your Revised Pay Structure Will Change

The government has officially implemented the new Labour Codes, bringing significant changes for companies and employees across sectors. One of the biggest shifts is in the salary structure, especially the way basic pay and allowances are calculated. Under the updated rules, at least 50% of an employee’s total CTC must be counted as ‘wages’, which includes basic pay and certain fixed components. This single change is expected to directly affect take-home salary, Provident Fund (PF) contributions, and gratuity calculations.

For employees whose current basic pay is less than 50% of their CTC, the change will likely reduce net monthly income, even though the overall CTC remains the same. Meanwhile, employers will see a rise in long-term compensation liabilities.

How Salaries Are Structured Right Now

For many years, companies have been designing salary packages in a particular way to optimise both employee take-home and employer costs. Typically, basic salary is kept between 25% and 40% of the CTC, while the remaining portion is allocated to special allowances and other components.

This model benefits employees by increasing the allowance portion of their salary, allowing them to receive more money in hand every month. At the same time, employers maintain lower PF and gratuity costs since these benefits are linked to basic pay.

Experts say that this salary design has been standard practice in most industries and has shaped payroll structures for years.

What Will Change Under the New Labour Codes

Once the new labour rules come into effect, this widely used salary model will no longer be permissible. The codes clearly state that at least 50% of total CTC must be classified as ‘wages’. This means companies must increase the basic salary component if it currently falls below that threshold.

Kuljeet Singh, Director at Gi Group Holding, explains that the new definition will “reshape how employers compute PF and gratuity.” Since most employers currently keep the basic pay low to manage PF and gratuity expenses, the new wage structure will increase their financial outflow.

Impact on Employees and Employers

The revised wage definition will affect both sides:

1. Higher PF Contribution

With a higher basic salary, the 12% PF deduction for both employer and employee will increase. This results in:

• More PF accumulation for the employee

• Higher contribution costs for the employer

2. Higher Gratuity Payout

Gratuity is calculated on the last drawn basic salary. A higher basic pay will automatically raise gratuity amounts, benefitting employees in the long run.

3. Lower Take-Home Salary

Since PF contributions will rise due to the increased basic salary, employees will take home less money every month. Although this may feel like an immediate loss, the long-term retirement savings will be stronger.

How the Calculation Changes: A Practical Example

Experts say that the reduction in take-home salary will depend on how much the basic pay deviates from the new 50% requirement. Here's a simplified example:

Current Structure

• Total CTC: ₹1,00,000 per month

• Basic Salary: ₹30,000

• PF deduction (12% of basic): ₹3,600

• Remaining amount (allowances): ₹70,000

• Take-home: Higher, due to lower PF deduction

New Structure Under Labour Code

Since basic must be at least 50% of CTC:

• Revised Basic Salary: ₹50,000

• New PF deduction (12% of basic): ₹6,000

• PF deduction increases by: ₹2,400

• Take-home salary reduces by: ₹2,400 per month

However, the employee’s PF balance will grow significantly over time, strengthening financial security at retirement.

Bottom Line

The new Labour Codes do not reduce your overall compensation—they simply redistribute it. Employees will see lower monthly take-home income but enjoy higher retirement benefits through increased PF and gratuity. Employers, on the other hand, must prepare for a rise in statutory contribution costs and adjust payroll structures accordingly.