The 50% Wage Rule: How India's New Labour Codes Change Salary Structures
India's four Labour Codes came into force on 21 November 2025, replacing 29 central labour laws. Of everything that changed, the provision payroll teams feel most is the new definition of "wages" - and the 50% wage rule that comes with it. If your salary structures haven't been reviewed since the codes took effect, this is the place to start.
Labour law is applied through central and state rules, and details can vary by state and establishment. Treat this as an explainer and confirm specifics with your compliance team or advisor before restructuring salaries.
Four codes instead of 29 laws
The codes consolidate earlier legislation into:
- Code on Wages, 2019 - minimum wages, payment of wages, bonus and equal remuneration.
- Industrial Relations Code, 2020 - employment terms, standing orders and disputes.
- Code on Social Security, 2020 - PF, ESI, gratuity, maternity benefit and more.
- Occupational Safety, Health and Working Conditions Code, 2020 - working conditions and safety.
The new definition of "wages"
Under the Code on Wages, wages means basic pay + dearness allowance (DA) + retaining allowance. A defined list of components sits outside wages, including:
- House rent allowance (HRA)
- Conveyance and travel allowances
- Overtime and commission
- Employer contributions to PF and pension
- Bonus that doesn't form part of the terms of employment
- Gratuity and retrenchment compensation
- Reimbursement of work-related expenses
How the 50% rule works
The excluded components are capped. If they add up to more than 50% of total remuneration, the amount above 50% is added back to wages. In practice, wages can't be less than half of total pay.
A simple monthly example:
- Total remuneration: ₹60,000
- Basic + DA: ₹20,000 (33%)
- Excluded allowances: ₹40,000 (67%)
The exclusions are ₹10,000 over the 50% cap, so that ₹10,000 is treated as wages. The wage base for statutory purposes becomes ₹30,000, not ₹20,000.
Why it matters for payroll
For years, many companies kept basic pay low - often 30-40% of CTC - and moved the rest into allowances, which kept statutory costs down. The 50% rule closes that gap. A higher wage base flows through to:
- Provident Fund - contributions are calculated on a larger base, up to the statutory wage ceiling (unless you contribute on actual wages). See how PF works in India, and note that the PF wage ceiling is now ₹25,000.
- Gratuity - worked out on last-drawn wages, so payouts rise. See how to calculate gratuity.
- Leave encashment and other wage-linked dues.
For employees in affected structures, that usually means higher retirement savings but slightly lower take-home; for employers, a higher statutory cost. If you're explaining the change to staff, our guide to CTC vs in-hand salary is a useful companion.
Two more changes payroll teams must act on
Final settlement within two working days. Under the Code on Wages, wages due to an employee who resigns, is dismissed or retrenched, or leaves because the establishment closes must be paid within two working days of separation. That covers salary dues and wage components such as leave encashment; gratuity and PF follow their own timelines. A month-long full and final settlement process no longer works.
Gratuity for fixed-term employees after one year. The Code on Social Security makes fixed-term employees eligible for gratuity after one year of continuous service, on a pro-rata basis - instead of the five years that applies to permanent employees.
What employers should do now
- Audit every salary structure - check that basic + DA (plus any retaining allowance) is at least 50% of total remuneration.
- Restructure where needed - rebalance allowances into basic and DA, or account for the add-back in statutory calculations.
- Recompute PF, gratuity and leave-encashment provisions on the corrected wage base.
- Update offer and appointment letters so new structures are compliant from day one.
- Speed up the exit process so wage dues can be paid within two working days.
- Communicate early - explain any change in take-home before it lands on a payslip.
- Check your state's rules - states notify their own rules under the codes, and details can differ.
How HRDesk24 helps
HRDesk24 payroll keeps each employee's full salary structure - basic, DA and every allowance - in one place, so reviewing structures against the 50% threshold and updating them is a structured change, not a spreadsheet hunt. PF and payslips are then computed from the structures you set, and because leave balances and attendance already live in the system, exit dues can be pulled together quickly when someone leaves.
Want help reviewing your salary structures for the new codes? Book a demo.