New Wage Code to Change Salary Structure: Higher PF & Gratuity, Lower Take-Home Pay for Employees

With the implementation of India’s new Wage Code, employees are set to see a major shift in how their salaries are calculated. While the new rules will significantly boost social security benefits like Provident Fund (PF) and gratuity, the take-home salary could reduce for many. The key change lies in restructuring salary components — especially Basic Pay — which will now make up at least 50% of the total CTC (Cost to Company).

Experts suggest that organizations must prepare for extensive salary restructuring to comply with the law, as the Wage Code introduces a fresh and standardized definition of wages that impacts payroll planning across industries.

🔹 What Is the New Wage Code?

The Code on Wages has officially come into effect, and the government is expected to notify detailed rules within the next 45 days. Under the new structure:

✔ Basic Salary must be at least 50% of total CTC
✔ Allowances such as HRA cannot exceed the remaining 50%

This change primarily affects companies that kept Basic Pay low and offered higher allowances to reduce PF and gratuity liabilities.

🔹 Why Will PF Contributions Increase?

PF contributions are calculated on Basic Pay. Both employer and employee contribute 12% of basic salary each month.
So, if the Basic Pay increases:

➡ PF deduction increases
➡ Monthly take-home salary decreases
➡ Retirement corpus becomes stronger

While employees may feel the immediate reduction in in-hand income, they will gain long-term financial stability through higher retirement savings.

🔹 Bigger Gratuity Payout for Employees

Gratuity is calculated based on:

• Last drawn Basic Salary

• Total years of service with the employer

As Basic Pay rises under the new Wage Code, the future gratuity amount employees receive will automatically increase.
Financial planners believe this change benefits employees who stay longer with an organization, helping them build a stronger financial cushion post-retirement.

🔹 Why Companies Need to Redesign Salary Structure

With the standardized definition of wages, companies will no longer be able to manipulate salary by inflating allowances. Now, Basic Pay + Dearness Allowance (DA) + Retaining Allowance together will form the official wage component.

This ensures fairness and transparency in salary payouts and prevents employers from reducing statutory benefits.

🔹 More Transparency in Social Security Benefits

One of the biggest advantages of the Wage Code is consistency in the calculation of different social security schemes. Since the definition of wages is uniform across the Wage Code and other labour codes, benefits like:

• PF

• Gratuity

• Pension

• Employee insurance

…will now offer clearer and more accurate entitlement to employees.

This move strengthens employee protection and improves access to statutory benefits across sectors.

🔹 What Allowances Won’t Count as Wages?

Not everything in your salary slip will be included in the wage definition. The following components will not be treated as wages:

✘ HRA (House Rent Allowance)
✘ Conveyance Allowance
✘ Travel and other standard allowances

Only Basic + DA + Retaining Allowance will be considered part of the wage for calculating statutory deductions and benefits.

✔ Final Takeaway

The new Wage Code aims to:

• Bring transparency to salary structures

• Improve social security coverage

• Ensure fair retirement benefits for all employees

However, workers must be prepared for a noticeable reduction in their take-home income once companies implement the revised structure.

It’s a trade-off — lower monthly cash in hand, stronger long-term financial security.