India’s new labour codes, which have overhauled the country’s labour laws, are tweaking salary structures for millions of salaried employees, with the 50% basic pay rule at the centre of the change. While
the reform is aimed at improving social security benefits, it might also impact the monthly in-hand salary for many.
The four labour codes that include the Code on Wages, the Industrial Relations Code, the Code on Social Security, and the Occupational Safety, Health and Working Conditions Code, came into effect on November 21, 2025, with draft rules issued later in December.
What Is the 50% Basic Pay Rule?
Under the Code on Wages, wages are defined in a way that requires basic pay, dearness allowance, and retaining allowance to constitute at least 50% of total remuneration.
This effectively limits the proportion of allowances, such as HRA, bonuses, and special allowances, that employers can include in salary structures to reduce statutory payouts.
Parag Bhide, partner at AQUILAW, said that if excluded components exceed 50% of total CTC, the excess must be added back to wages for calculating statutory contributions.
“The 50% rule under the new labour codes requires that certain excluded components (such as HRA, overtime, conveyance allowances) shall not exceed 50% of the total CTC of an employee. In case the excluded components exceed 50% of the CTC, the excess needs to be added back to wages for computation of statutory deductions and social security benefits. Before labour codes, the general practice had been to keep basic wages at 30-40% of the total CTC. Therefore, employers are revising their salary structures to align with the new wage requirement. This is likely to result in higher statutory deductions and higher social security contributions,” Bhide added.
Why Employers Are Restructuring Salaries
Historically, companies have kept basic pay at around 30-40% of total CTC to optimise tax efficiency and reduce contributions towards the provident fund and gratuity.
However, with the new wage definition, employers are now expected to rebalance salary structures by increasing the basic pay component and reducing allowances.
Rohitaashv Sinha, partner at King Stubb & Kasiva, said the intent is to standardise wage structures and strengthen social security benefits rather than alter tax liability directly.
“The objective of this provision is to standardise wage structures and ensure better social security contributions such as provident fund and gratuity, rather than to alter the tax burden on employees. Therefore, any potential impact on take-home salary would primarily arise from employer-led restructuring of salary components to align with the labour codes,” he added.
Impact on In-Hand Salary
The restructuring is likely to affect take-home salary in two key ways:
1. Higher statutory deductions
An increase in basic pay leads to higher contributions towards the provident fund and gratuity. Since these are linked to basic wages, employees will see a larger portion of their salary diverted towards long-term savings.
2. Reduced tax-efficient components
Allowances such as HRA, leave travel allowance (LTA), and meal benefits, traditionally used to lower taxable income, may be reduced. This could increase taxable salary, particularly under the old tax regime.
CA Suresh Surana said that while this may lower monthly take-home pay, it enhances retirement savings and social security coverage.
“The 50% basic pay requirement stems from the newly implemented labour codes, which prescribe that wages comprising basic pay, dearness allowance, and retaining allowance must constitute at least 50% of total remuneration. As a result, employers may need to review salary structures by increasing the basic pay component and correspondingly reducing allowances. For employees, this may lead to a reduction in monthly in-hand salary, because an increase in basic pay will proportionately increase statutory deductions such as provident fund and gratuity contributions. While this could lower take-home pay, it also enhances long-term retirement planning and social security benefits,” Surana said.
How Will It Impact Your Tax Liability?
The tax impact of the new structure will vary depending on whether an employee opts for the old or new tax regime.
Under the old regime, higher provident fund contributions may still offer deductions within prescribed limits. However, reduced exemptions could offset these benefits. Under the new tax regime, where most exemptions are not available, the effect is likely to be more visible in the form of lower in-hand salary rather than tax savings.
“From a tax standpoint, the impact will depend on the salary structure and the tax regime opted for,” Surana said.
The wage definition is already applicable, even as some rules are still being finalised.
