New labour codes to raise payroll costs as wage definition tightens

India’s new labour codes are expected to increase payroll expenses for many employers, as the government enforces a stricter definition of wages and moves toward a more uniform national pay structure.

Under the updated framework, basic salary and dearness allowance must account for at least 50% of total compensation, meaning companies that rely heavily on allowances and variable pay will see higher contributions toward provident fund, gratuity and other statutory benefits.

“If allowances exceed 50%, the excess will be added to wages for calculating social security contributions,” Labour Secretary Vandana Gurnani said.

The rules are expected to particularly affect startups, IT firms and gig-economy employers where flexible pay structures have been common.

The codes also empower the Centre to set a mandatory national floor wage, which states cannot go below—potentially pushing up wage levels in lower-cost regions. A committee will determine the benchmark in the coming months.

While government officials argue the changes will improve transparency and support worker protections, companies say the shift may require redesigning compensation models and budgeting for higher recurring liabilities.

The Centre believes greater digitisation and algorithm-based inspections will ensure compliance where earlier enforcement was weak.