The long-awaited New Labour Code has finally come into effect, bringing a sweeping transformation to India’s salary structure. While your gross salary will remain unchanged, your in-hand salary is likely to decrease, even as your PF and gratuity contributions increase, strengthening your retirement safety net.
What Has Changed Under the New Labour Code?
The government’s latest clarification dated 21 November has redefined the concept of “Wages”. Under the new definition, Basic Salary, Dearness Allowance (DA), and Retaining Allowance together must constitute at least 50% of the total salary.
All key social-security calculations—including PF, gratuity, and pension—will now be linked to this minimum 50% wage component.
Crucially, your total Gross Salary and CTC remain the same, but the internal components of your salary will be reorganised.
Impact on PF and Gratuity
According to an ET report, the Code on Wages will increase the contribution towards Provident Fund (PF) and gratuity, since both are calculated on the Basic Salary.
- PF Contribution: 12% of Basic Pay
- Gratuity Calculation: Based on last drawn Basic Pay and years of service
With the Basic Salary now forming a larger portion of total compensation, employees and employers will both contribute more to PF and gratuity.
Result:
- Higher compulsory savings for retirement
- Lower take-home salary each month
Why Was This Change Needed?
Many companies intentionally kept the Basic Salary low while offering multiple allowances. This reduced their PF and gratuity liabilities. The new code aims to prevent this practice and ensure better financial security for workers after retirement.
Will Your Monthly Salary Decrease?
Yes, experts confirm that for employees whose Basic Pay is currently less than 50% of the CTC, companies will be required to restructure their salary.
This will result in:
- Higher PF deductions
- Higher gratuity accumulation
- Lower monthly in-hand salary
However, your long-term retirement fund will grow significantly.
Does It Affect Your Gross Salary?
No.
Your gross salary will remain exactly the same. The change only affects the distribution of salary components—not the total package offered by the employer.
Who Will Be Affected the Most?
Employees whose salary structure includes:
- Less than 50% Basic Pay, and
- A large portion as allowances
Such employees will see significant restructuring and a noticeable drop in take-home salary.
What Do Experts Say?
Better Retirement Security, Lower Monthly Pay
Suchita Dutta, Executive Director, Indian Staffing Federation:
“The new labour code will strengthen PF and gratuity-linked retirement benefits, but employees should expect a reduction in take-home pay.”
Divya Baweja, Partner, Deloitte India:
“HRA, travel allowance and other perks cannot exceed 50% of total salary. Simply increasing Basic Pay won’t solve compliance issues—companies must restructure the full salary pattern.”
Puneet Gupta, Partner, EY India:
“Gratuity payouts will increase since the new wage definition includes Basic Pay and most allowances—excluding HRA and conveyance.”
How Will the Calculation Work Now?
Professional services firms note that:
- Basic Salary + DA + Retaining Allowance must be 50% of total salary
- All labour codes now use the same wage definition
- Calculations for PF, gratuity, and pension will follow a uniform method across industries
This means simpler compliance for companies—and transparent social security benefits for employees.
Key Highlights at a Glance
- 50% Mandatory Basic Pay: At least half of total salary must be Basic + DA + Retaining Allowance
- Higher PF Contribution: Calculated as 12% of Basic Pay
- Higher Gratuity: Due to increased Basic Pay
- Lower Take-home Salary: But greater retirement accumulation
- Gross Salary Unchanged: Only internal structure modified
- Greater Social Security: More secure financial future
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