New Labour Codes: PF and Gratuity Will Increase, But Take-Home Pay May Drop

New Delhi: The Government of India on Friday implemented four major labour codes that are set to reshape salary structures for employees across the country. Effective from 21 November 2025, the new codes aim to simplify labour laws, enhance social security, improve worker benefits, and modernize employment regulations.

The Four Labour Codes

The newly implemented laws include:

1. Code on Wages 2019
2. Industrial Relations Code 2020
3. Code on Social Security 2020
4. Occupational Safety, Health and Working Conditions Code 2020

These codes consolidate 29 existing labour laws and modernize outdated colonial-era provisions in line with global standards.

Impact on Salary Structure

Under the Code on Wages, a minimum of 50% of an employee’s salary must now constitute basic pay. Since Provident Fund (PF) and Gratuity contributions are calculated on basic pay, this means:

• PF and Gratuity contributions will increase, benefiting employees’ long-term retirement savings.
• Take-home pay may decrease slightly, as the total CTC (Cost to Company) remains the same but a larger portion is allocated to PF and Gratuity.

Companies Will Need to Restructure

The government will release detailed rules within 45 days. Companies will then be required to revise salary structures to comply with the new norms. The objective is to prevent employers from keeping basic pay low and inflating allowances to reduce their PF and Gratuity contributions. Currently, 12% of basic pay goes to PF, and Gratuity is calculated based on the last drawn basic salary and years of service.

Expert Opinions

Suchita Dutta, Executive Director of the Indian Staffing Federation, said:

“The new labour codes standardize the definition of wages across ‘Code on Wages’ and ‘Social Security’ laws. PF and Gratuity benefits will improve, but take-home pay may reduce if companies lower allowances to cut costs.”

Anjali Malhotra, Partner at Nangia Group, added:

“Wages now include Basic Pay, Dearness Allowance (DA), and Retaining Allowance (RA). At least 50% of total earnings (or another percentage as mandated by the government) will form part of wages, ensuring uniform calculation of PF, Gratuity, pension, and other social security benefits.”

How It Changes Previous Practices

Previously, companies often kept basic pay low and paid the rest as allowances, which reduced PF and Gratuity contributions. Now, with at least half of the CTC mandated as basic salary, retirement savings will increase, though monthly take-home pay may be slightly lower. This step prioritizes long-term financial security for employees, even if it slightly affects immediate cash in hand.