Why Your Next Paycheck May Drop: The Wage Code’s 50% Basic Rule Explained

India’s salary structures are set for a major overhaul as the Code on Wages—part of the government’s sweeping labour law reforms—comes into effect. One of the biggest consequences for employees will be an increase in provident fund (PF) and gratuity contributions, which could significantly reduce take-home pay even as long-term retirement savings rise.Under the Code on Wages, the “basic salary” component must constitute at least 50% of an employee’s total cost-to-company (CTC), or a percentage that the government may notify. This shift is aimed at correcting a long-standing practice in Indian companies: keeping basic pay artificially low while inflating allowances to reduce statutory retirement payouts.Why Basic Salary MattersBasic salary forms the foundation

for all major statutory benefits, including PF and gratuity. The PF contribution alone is calculated as 12% of basic pay, while gratuity is computed based on the final drawn basic pay and years of continuous employment.With the new rules mandating a higher basic component, both employers and employees will now contribute more to PF and gratuity. This means two things simultaneously:

1. Retirement corpus will increase, offering greater long-term financial security.
2. Monthly in-hand salaries will shrink, since PF contributions will rise within the same CTC structure.

The Code officially came into effect on November 21, but companies will receive the detailed rules within 45 days. Once notified, establishments will have to reconfigure their salary structures to comply.Plugging Loopholes and Ensuring FairnessExperts note that the provision is designed to discourage companies from gaming the system by reducing basic pay and inflating reimbursements or allowances.“This provision on basic salary has been introduced to prevent companies from deliberately keeping the basic pay low while enhancing allowances to minimise their contribution to retirement funds and gratuity,” according to the official explanation.Suchita Dutta, executive director of the Indian Staffing Federation, said that the unified definition of “wages” across labour codes is expected to bring structural clarity. “This would mean better retirement security through higher gratuity and provident fund but a possible dip in take-home pay if employers restructure allowances downward to offset costs,” she noted.A Consistent Definition of Wages Across IndiaOne of the biggest changes introduced under the new labour framework is the uniformity in the definition of wages across all codes. This ensures consistency in how social security benefits are calculated.As Anjali Malhotra, partner at Nangia Group, explained:“Wages now include basic pay, dearness allowance and retaining allowance; 50% of the total remuneration (or such percentage as may be notified) shall be added back to compute wages, ensuring consistency in calculating gratuity, pension and social security benefits.”This tighter definition means allowances such as bonuses, overtime, HRA and conveyance cannot be disproportionately inflated to reduce employer liabilities.Higher Gratuity Outgo LikelyPuneet Gupta, partner at EY India, said employees can expect a meaningful jump in gratuity benefits when they exit an organisation.“The roll-out of the labour codes could lead to higher gratuity as it will be calculated on ‘wages’, which would include basic salary and all allowances except HRA and conveyance allowance,” he said.For companies, this could mean considerably higher end-of-service payouts for long-serving employees.Impact on Salaries Going ForwardThe key outcome of the wage restructuring is expected to be:

• Higher PF contributions
• Higher gratuity liabilities
• Lower take-home pay
• More transparent and standardised salary structures
• Stronger retirement safety nets

While employees may initially feel the pinch of reduced in-hand salaries, industry experts argue that the reforms strengthen long-term financial well-being and streamline India’s fragmented labour laws.