New Labour Code Salary Structure and the 50 Percent Wage Rule in 2026

Written by CA Nandini Hasija, Krystal7 Consultants. Last updated 23 October 2026.

Under section 2(y) of the Code on Wages, 2019, in force since 21 Nov 2025, wages mean basic pay, dearness allowance and retaining allowance. HRA, conveyance, overtime, commission, employer PF and a few other items are excluded. If those excluded items exceed 50 percent of total remuneration, the excess is added back to wages. That wage figure now drives gratuity, ESI, bonus and PF. A structure with basic pay well below half of pay needs to change.

This page explains the definition clause by clause, the 50 percent test, the effect on each benefit, floor wage and payment dates. It ends with a CTC restructuring worked through in rupees and the offer letter changes a foreign owned subsidiary should make.

What is the new labour code salary structure rule?

The rule is the definition of wages in section 2(y) of the Code on Wages, 2019. Wages are basic pay, dearness allowance (DA) and retaining allowance, plus any excluded allowances above half of total remuneration. The Code came into force on 21 Nov 2025, and one definition serves all four labour codes.

The Government brought the Code on Wages into force on 21 Nov 2025 through S.O. 5322(E). The Ministry of Labour and Employment announced the date that day. The Code replaced the Payment of Wages Act, 1936, the Minimum Wages Act, 1948, the Payment of Bonus Act, 1965 and the Equal Remuneration Act, 1976.

FAQ 6 of the ministry's FAQs on the labour codes of 30 Dec 2025 applies one wage definition to all four codes. Section 2(88) of the Code on Social Security, 2020 repeats it for PF, ESI and gratuity. FAQ 7 of the Additional FAQs as on 16 Mar 2026 confirms the 21 Nov 2025 start.

The rule does not fix your CTC. It changes how the CTC splits into statutory heads, and so what each head costs. Payroll must compute "Code wages" for each employee before PF, ESI, gratuity, bonus or leave pay. Our overview of the new labour codes for foreign owned companies covers the other changes.

What does the Code on Wages count as wages?

Section 2(y) starts wide. Wages are "all remuneration whether by way of salaries, allowances or otherwise", and always include basic pay, DA and retaining allowance. Eleven items are then excluded, in clauses (a) to (k). Only clauses (a) to (i) are tested against the 50 percent cap.

The text of the Code on Wages lists the exclusions as follows.

Clause of section 2(y)	Excluded item	Inside the 50% test	Typical payslip head
(a)	Bonus payable under a law, where it is not part of the contractual remuneration	Yes	Statutory bonus
(b)	Value of house accommodation, light, water, medical attendance or another amenity excluded by government order	Yes	Company lease, medical facility
(c)	Employer contribution to a pension or provident fund, with interest	Yes	Employer PF, employer NPS
(d)	Conveyance allowance or the value of a travelling concession	Yes	Conveyance, LTA
(e)	A sum paid to meet special expenses that the job causes	Yes	Uniform, tools, field expense allowance
(f)	House rent allowance (HRA)	Yes	HRA
(g)	Remuneration under an award, settlement or court order	Yes	Award arrears
(h)	Overtime allowance	Yes	Overtime
(i)	Commission	Yes	Sales commission
(j)	Gratuity payable on termination	No	Gratuity
(k)	Retrenchment compensation, other retirement benefit, or ex gratia on termination	No	Severance, ex gratia

Three further parts of section 2(y) matter for payroll:

• Second proviso. For equal pay between genders and for payment of wages, clauses (d), (f), (g) and (h) count as wages. So HRA, conveyance, award pay and overtime must reach the employee on time like basic pay.
• Explanation. Remuneration in kind counts as wages up to 15 percent of total wages. Additional FAQ 18 gives food coupons, ration items and mobile recharges as examples.
• Items outside wages altogether. FAQ 3 of 30 Dec 2025 says performance based incentives, ESOPs, variable pay and reimbursements are not wages. FAQ 5 says leave encashment is not an allowance. Additional FAQ 4 adds that annual performance incentives are not wages.

So RSUs and options granted by a foreign parent stay outside wages. Our note on RSU and ESOP tax for employees of a foreign parent covers their tax side.

Section 2(y) does not name the "special allowance" found in most Indian salary structures. The next section deals with that gap.

How does the 50 percent cap work?

The first proviso to section 2(y) adds up the items in clauses (a) to (i). If that total exceeds one half of total remuneration, the excess is "deemed as remuneration" and added to wages. The Central Government may notify a percentage other than half. Every ministry document we read applies one half, so check the Gazette for any new figure before you rely on it.

In formula form, Code wages = basic + DA + retaining allowance + (clauses (a) to (i) items minus half of total remuneration). The bracket is never below zero.

The harder question is what "total remuneration" includes. The ministry answered it in Additional FAQ 1 of 16 Mar 2026.

Item	In total remuneration for the test	Ministry source
Basic pay, DA, retaining allowance	Yes	Section 2(y)
HRA, conveyance, LTA and other allowances	Yes	Section 2(y); FAQ 4 of 30 Dec 2025
Overtime allowance	Yes	Additional FAQ 1 and 8
Employer PF and pension contributions	Yes	Additional FAQ 1
Statutory bonus	Yes	Additional FAQ 1
Gratuity, actual or shown in CTC	No	Additional FAQ 1
Employer ESI contribution	No	Additional FAQ 1
Other retirement benefits	No	Additional FAQ 1
ESOPs, RSUs, variable pay, performance incentives, reimbursements	No, they are not wages	FAQ 3 of 30 Dec 2025; Additional FAQ 4

Two points in the ministry's own material need care.

The FAQ 7 illustration. FAQ 7 of 30 Dec 2025 takes total remuneration of INR 76,000 a month. Basic plus DA is INR 20,000, allowances are INR 40,000, and "gratuity and retrenchment compensation" are INR 16,000. Half of INR 76,000 is INR 38,000, so INR 2,000 is added back and wages become INR 22,000.

Additional FAQ 1 later said gratuity is not part of total remuneration. Applied to the same figures, total remuneration is INR 60,000 and half is INR 30,000. The allowances exceed that by INR 10,000, so wages become INR 30,000. The later FAQ answers the question directly, so we follow it. Additional FAQ 1 does not withdraw the illustration, so expect auditors and inspectors to ask which one you used.

The special allowance. FAQ 4 of 30 Dec 2025 tests "allowances and benefits together" against 50 percent. Read that way, a fixed special allowance sits in the tested pool with HRA and conveyance. The statute is stricter. Clauses (a) to (i) list specific items, and a special allowance is none of them. On the text, it is remuneration that is not excluded, so it counts as wages in full.

Additional FAQ 13 excludes payments outside section 2(88) from gratuity, but does not name special allowance. We call the two views the ministry reading and the text reading. We price both, and we design new structures so they agree.

How does the wage definition change PF, ESI, gratuity and bonus?

Each benefit now uses Code wages, but each applies its own ceiling or limit on top. Gratuity has no wage cap, so it moves most. ESI coverage moves for staff earning up to about INR 42,000. PF moves only where you pay on actual wages or wages sit near the INR 25,000 ceiling.

Benefit	Wage base under the old law	Wage base now	Limit that also applies	Source
Provident fund	Basic wages, DA and retaining allowance (EPF Act, 1952)	Code wages	INR 25,000 a month ceiling from 17 Sep 2026, unless you pay on higher wages	Code on Social Security, section 2(88); S.O. 5109(E)
ESI coverage and contribution	ESI Act wages, which counted most allowances	Code wages	Coverage up to INR 21,000 a month	Additional FAQ 12
Gratuity	Basic plus DA (Payment of Gratuity Act, 1972)	Code wages, last drawn	Payout capped at INR 20,00,000	Code on Social Security, section 53; FAQ 12
Statutory bonus	Salary or wage under the Payment of Bonus Act, 1965	Code wages	Eligibility up to INR 21,000; computed on INR 7,000 or central minimum wage if higher	S.O. 4711(E); S.O. 4710(E)
Leave encashment and leave pay	Basic plus DA under most policies	Code wages	None in the Code	OSH Code, section 2(1)(zzj) and section 32
Final pay and equal pay	Payment of Wages Act and Equal Remuneration Act	Code wages plus HRA, conveyance, award pay and overtime	None	Section 2(y), second proviso

Provident fund. PF is 12 percent of wages from each side. The ceiling rose from INR 15,000 to INR 25,000 on 17 Sep 2026 under S.O. 5109(E), as the ministry's release of 23 Sep 2026 records. Where you restrict PF to the ceiling, employer PF is INR 3,000 a month whatever the wage definition says.

The definition bites where you pay PF on actual wages, or where Code wages sit below INR 25,000. Employer PF is inside total remuneration for the test, so payroll must solve wages and PF together, as scenario 2 shows. Our guide to PF and ESI for foreign owned companies covers rates, expats and due dates.

ESI. Additional FAQ 12 applies Code wages to ESI from 21 Nov 2025 and keeps the INR 21,000 limit. Old ESI wages counted most allowances, but Code wages can be as low as half of total remuneration. So we retest everyone earning up to INR 42,000.

Gratuity. Gratuity is 15 days' wages a year, computed as monthly wages × 15 ÷ 26. Additional FAQ 17 bases it on the wages last drawn at exit, for exits on or after 21 Nov 2025. The ministry does not say in terms how years served before that date are treated, so we price every year at last drawn Code wages. Our guide to gratuity under the Code on Social Security covers eligibility and fixed term staff.

Statutory bonus. Section 41(2) of the Code on Wages applies bonus at 20 or more employees. Section 26(1) requires at least 30 days' work in the accounting year. S.O. 4711(E) of 25 Aug 2026 limits bonus to employees with wages up to INR 21,000 a month. For employees whose wages exceed INR 7,000, S.O. 4710(E) computes bonus as if the wage were INR 7,000 a month, or the Centre's minimum wage if higher.

Both notifications apply from 21 Nov 2025. Section 26 sets bonus at 8.33 percent up to 20 percent, payable within eight months of the year end (section 39(1)).

Does the Code on Wages cover managers and senior staff?

Yes. Section 2(k) defines an employee as anyone employed on wages for skilled, unskilled, supervisory, managerial, technical or clerical work. Minimum wages, timely payment, permitted deductions and equal pay now reach every employee, whatever the salary.

The Payment of Wages Act, 1936 covered only employees earning up to INR 24,000 a month. The PIB backgrounder on the Code on Wages of 23 Nov 2025 records that this ceiling is gone. The Minimum Wages Act, 1948 reached only scheduled employments, about 30 percent of the workforce by the same backgrounder.

The Code also defines a narrower "worker" in section 2(z). It excludes managerial and administrative staff, and supervisors earning more than INR 15,000 a month. The IR Code and the OSH Code use INR 18,000 for the same test.

What is the floor wage and how does it relate to minimum wages?

The floor wage is a national minimum that the Central Government fixes under section 9 of the Code on Wages. It reflects the minimum living standards of a worker and may differ by area. A state cannot fix its minimum wage below the floor wage. Where a state's existing minimum wage is higher, the state cannot reduce it.

Rule 10 of the Code on Wages (Central) Rules, 2026, notified as G.S.R. 343(E) on 8 May 2026, sets the method. The Centre may consult the Central Advisory Board and the State Governments, and may weigh food, clothing, housing and the minimum standard of living. It may review the floor wage ordinarily at intervals not exceeding five years.

We could not find a notification fixing a floor wage amount on the official pages we read. The Lok Sabha reply of 10 Aug 2026 to Unstarred Question 3467 asked about a national floor wage. It answered only on existing minimum wage rates. Check the Gazette of India at egazette.gov.in and the notifications on labour.gov.in before you rely on any floor wage figure. Until a floor wage is notified, the minimum wage fixed by the appropriate government is the rate that applies.

The appropriate government fixes minimum rates mainly by skill and geography (section 6) and reviews them at least every five years (section 8). Under rule 4 of the central rules, the Centre revises the variable dearness allowance for its own sphere before 1 April and again before 1 October. It uses the Labour Bureau's consumer price index.

For a private company office, the state is usually the appropriate government. A Gurugram employee's minimum wage comes from Haryana's notification for the skill category. Professional salaries sit far above these rates. The minimum wage still matters for drivers, housekeeping staff and office assistants.

When must wages be paid under the Code on Wages?

Section 17 of the Code on Wages sets the deadline by wage period. Monthly wages are due before the end of the 7th day of the next month. When an employee is removed, dismissed, retrenched, resigns or loses the job because the establishment closes, wages are due within two working days.

Situation	Deadline	Section
Daily wages	At the end of the shift	Code on Wages, section 17(1)
Weekly wages	On the last working day of the week, before the weekly holiday	Section 17(1)
Fortnightly wages	Before the end of the second day after the fortnight ends	Section 17(1)
Monthly wages	Before the end of the 7th day of the next month	Section 17(1)
Removal, dismissal, retrenchment, resignation or closure	Within two working days	Section 17(2)
Bonus	Within eight months from the close of the accounting year	Section 39(1)
Wage slip	At or before payment, in Form 5 under the central rules	Section 50(3); rule 52
Claim by the employee	Within three years of the claim arising	Section 45

Section 16 caps any wage period at one month. Section 18(3) caps deductions in a wage period at 50 percent of wages. The ministry's Compliance Handbook for Employers of February 2026 says records must be preserved for five years. Rule 51(4) of the central rules sets the same period from the last entry.

The PIB release of 21 Nov 2025 lists release of salary by the 7th of every month as mandatory. A parent that pays Indian staff on the 10th or 15th must move the date.

The two day rule catches most foreign owned subsidiaries out. A 45 day full and final policy breaches section 17(2) for every leaver. Section 45 lets the authority add compensation of up to ten times the claim. We start the final payroll on the day notice is accepted.

How should a foreign owned subsidiary restructure CTC?

Start by computing Code wages for every employee under both readings of the 50 percent rule. Then choose a design. Either set basic pay plus DA at half of total remuneration, or remove the special allowance so both readings agree. The worked example prices both. A third route keeps the payslip and adds back the excess every month, which is harder to explain to staff.

Whichever you choose, check four things before you issue new letters:

• Income tax. HRA exemption depends on salary, and LTA has its own conditions. Model each employee's tax before moving amounts between heads.
• Contract terms. An offer letter that promises a fixed CTC lets you move money between heads. One that promises a fixed take home pay does not, without consent.
• Notice. Section 40 of the Industrial Relations Code requires 21 days' notice to workers before a change in wages, allowances or another Third Schedule condition.
• Transfer pricing. A captive subsidiary that bills its parent at cost plus a mark up will show higher costs. Update the intercompany budget, as our note on transfer pricing between a UK parent and an Indian subsidiary explains.

Managers are not "workers" under the IR Code, but we give them the same notice.

What should an Indian subsidiary of a foreign group change in offer letters?

Rewrite the pay schedule so each head maps to section 2(y), and state the statutory bases in words. Add the two working day final pay rule, the PF ceiling and the gratuity terms. Issue the letter in the form your state's OSH rules prescribe.

Section 6(1)(f) of the OSH Code requires a letter of appointment for every employee. Staff in service on 21 Nov 2025 had to receive one within three months, so by 21 Feb 2026.

Rule 6 of the OSH (Central) Rules, 2026 (G.S.R. 345(E) of 8 May 2026) lists the contents for the central sphere. They include the employee's name, date of birth, worker ID, UAN or ESI number, designation and type of employment. They also include skill category, date of joining, wages and allowances, social security coverage and broad duties. A letter to a woman employee must also state her maternity benefits.

Where the state is the appropriate government, its rules set the form. The table lists what we change in a typical letter drafted by a parent's HR team.

Clause	Common wording in a parent's template	What we write now	Why
Pay schedule	CTC with a large "flexible" or "special" allowance	Each head named and tagged as wages or excluded under section 2(y)	Both readings of the 50% rule must be testable
Statutory bases	Silent	Code wages for PF, ESI, gratuity and bonus, with PF restricted to INR 25,000	Section 2(88); S.O. 5109(E)
Gratuity	"As per the Payment of Gratuity Act"	Code on Social Security, 2020, on last drawn Code wages; one year for fixed term staff	Section 53; IR Code, section 2(o)
Pay date	"Last working day" or "by the 10th"	Before the end of the 7th day of the next month	Code on Wages, section 17(1)
Final settlement	"Within 45 days of the last working day"	Wages within two working days; gratuity within 30 days	Section 17(2); Code on Social Security, section 56
Variable pay and equity	Bundled with fixed pay	Separate plan, stated not to be wages	FAQ 3 of 30 Dec 2025
Hours and overtime	"As per business needs"	Normal hours, weekly holiday and overtime at twice wages with consent, for workers	OSH Code, sections 25 to 27
Leave	Parent's global policy	At least the OSH Code entitlement or the state law, whichever is better	OSH Code, section 32
Deductions	Open ended recovery clause	Only deductions section 18 allows, within 50% of wages	Code on Wages, section 18
Fixed term contracts	Lower pay, no gratuity	Same hours, pay and benefits as permanent staff	IR Code, section 2(o)

The OSH Code's hours and leave rules are covered in our guide to working hours, overtime and leave under the OSH Code.

What changed in 2026

Most of the detail that payroll needs arrived during 2026. The table lists each step by date and instrument.

Date	Old position	New position	Instrument
21 Nov 2025	Four separate wage Acts, each with its own wage definition	Code on Wages in force; one wage definition with the 50% rule	S.O. 5322(E); S.O. 5319(E) for the Code on Social Security
30 Dec 2025	No official reading of section 2(y)	FAQs with the INR 76,000 illustration and exclusions for ESOPs, incentives, variable pay and reimbursements	MoLE FAQs on Labour Codes
30 Dec 2025	No central rules under the codes	Draft central rules published for comment	MoLE Annual Report 2025-26, para 1.3
16 Mar 2026	Open questions on what total remuneration includes	Employer PF and statutory bonus in; gratuity and ESI out; overtime in; timely pay for all employees	MoLE Additional FAQs 1, 2 and 8
8 May 2026	Rules under the repealed Acts	Code on Wages (Central) Rules, 2026 in force on publication	G.S.R. 343(E)
25 Aug 2026	Bonus limits under the Payment of Bonus Act	Eligibility up to INR 21,000; computation on INR 7,000 or central minimum wage; both from 21 Nov 2025	S.O. 4711(E); S.O. 4710(E)
17 Sep 2026	PF wage ceiling INR 15,000	PF wage ceiling INR 25,000; September 2026 split at 17 Sep in one ECR	S.O. 5109(E); EPFO FAQs

The EPFO's FAQs on the revised ceiling explain the September 2026 split. Contributions for 1 to 16 Sep use INR 15,000, and those for 17 to 30 Sep use INR 25,000.

Worked example

Scenario 1. A UK company's Gurugram subsidiary pays a software engineer a CTC of INR 18,00,000 a year (INR 1,50,000 a month). The CTC includes employer PF, a gratuity accrual and a telephone reimbursement paid against bills. PF is restricted to the ceiling. The offer letter dates from 2024.

Head (INR a month)	2024 structure	Treatment under section 2(y)
Basic pay	45,000	Wages
HRA	22,500	Excluded, clause (f)
Leave travel allowance	3,750	Excluded, clause (d)
Special allowance	72,787	Disputed between the two readings
Telephone reimbursement, against bills	2,000	Not wages (FAQ 3)
Employer PF at 12% of INR 15,000	1,800	Excluded, clause (c)
Gratuity accrual (basic × 15 ÷ 26 ÷ 12)	2,163	Outside the test (Additional FAQ 1)
CTC	1,50,000

Step 1. Test the 2024 structure today. From 17 Sep 2026, employer PF is 12 percent of INR 25,000, or INR 3,000. Total remuneration for the test is INR 1,47,037 (45,000 + 22,500 + 3,750 + 72,787 + 3,000). Half of it is INR 73,518.50.

Under the ministry reading, the tested pool is everything except basic pay, or INR 1,02,037. It exceeds half by INR 28,518.50. Code wages are INR 73,519 after rounding.

Under the text reading, the special allowance is wages. Wages are INR 1,17,787 (45,000 + 72,787). The excluded pool is INR 29,250, below half, so nothing more is added.

Step 2. Price gratuity. One year of gratuity is wages × 15 ÷ 26. It is INR 25,962 on the old basic of INR 45,000. It becomes INR 42,415 under the ministry reading and INR 67,954 under the text reading.

If the employer absorbs the change, monthly cost rises by INR 2,572 under the ministry reading. That is INR 1,200 of PF and INR 1,372 of gratuity. Under the text reading, it rises by INR 4,700.

Step 3. Restructure inside the same CTC. We hold the CTC at INR 1,50,000 and test two designs. In design A, basic pay equals half of total remuneration. In design B, the special allowance disappears and HRA is half of basic pay.

Head (INR a month)	2024 structure	Design A: basic at 50%	Design B: no special allowance
Basic pay	45,000	72,263	91,242
HRA	22,500	36,132	45,621
Leave travel allowance	3,750	3,750	3,750
Special allowance	72,787	29,381	Nil
Employer PF	1,800	3,000	3,000
Gratuity accrual	2,163	3,474	4,387
Telephone reimbursement	2,000	2,000	2,000
CTC	1,50,000	1,50,000	1,50,000
Code wages, ministry reading	73,519	72,263	91,242
Code wages, text reading	1,17,787	1,01,644	91,242
Cash pay after employee PF, before tax	1,42,237 (PF at INR 1,800)	1,38,526	1,37,613

Design A is cheapest on the ministry reading. Its weakness is the text reading. If an inspector or a court applies it, Code wages are INR 1,01,644. Gratuity then accrues at INR 4,887 a month, not INR 3,474. The CTC would be short by INR 1,413 a month.

Design B costs INR 913 a month more in gratuity than design A. In return, both readings give the same wages, so the CTC holds on any reading.

Step 4. Explain the take home change. Under design A, cash pay after employee PF falls by INR 3,711 a month, from INR 1,42,237 to INR 1,38,526. INR 1,200 of that is the higher employee PF from the new ceiling, which goes to the employee's own PF account. The other INR 2,511 funds the higher employer PF and gratuity accrual inside the CTC.

Step 5. Price the past service. Additional FAQ 17 bases gratuity on the wages last drawn at exit. We price every year of service on those wages. After six years, the engineer's gratuity is INR 1,55,769 on the old basic of INR 45,000. It is INR 2,50,141 on design A wages. Ask your actuary and auditor whether that catch up is a past service cost in the accounts for the year that includes 21 Nov 2025.

Scenario 2. An office executive in the same subsidiary earns a gross of INR 30,000 a month. The structure is basic INR 12,000, HRA INR 6,000, conveyance INR 3,000 and special allowance INR 9,000. Code wages are below INR 25,000, so PF runs on actual Code wages.

Employer PF sits inside the 50 percent test, so we solve for wages. Under the ministry reading, wages equal half of (INR 30,000 + 12 percent of wages). That gives wages of INR 15,957 and employer PF of INR 1,915. Under the old EPF base of basic pay, employer PF was INR 1,440.

ESI changes more. The old ESI wage counted the whole INR 30,000, so the executive was outside ESI. Code wages of INR 15,957 are below INR 21,000, so ESI applies. The employer pays INR 519 and the employee INR 120 a month, each rounded up.

Under the text reading, wages are INR 21,000 (basic plus special allowance). ESI still applies, because the limit is up to INR 21,000. Statutory bonus also applies on either reading. The minimum bonus is INR 6,997 a year (8.33 percent of INR 7,000 × 12), and the maximum is INR 16,800. Both rise if the central minimum wage exceeds INR 7,000.

Statutory bonus also counts in total remuneration under Additional FAQ 1. We test it in the month of payment, so this monthly example leaves it out.

Common mistakes

1. Testing only basic pay against half of CTC. The test uses total remuneration. It excludes gratuity and ESI but includes employer PF and statutory bonus. Fix: build total remuneration exactly as Additional FAQ 1 describes.
2. Copying the FAQ 7 illustration. It counts gratuity in total remuneration, which Additional FAQ 1 later excluded. Fix: follow Additional FAQ 1 and record that choice in the payroll file.
3. Treating the special allowance as settled. The text reading counts it as wages in full. Fix: price both readings, or move to a design where they agree.
4. Testing ESI on gross pay. ESI coverage now uses Code wages. Fix: retest every employee earning up to INR 42,000, and register new ESI members in the same month.
5. Leaving PF at INR 15,000. The ceiling became INR 25,000 on 17 Sep 2026. Fix: update the payroll master and split the September 2026 ECR at 17 Sep.
6. Including ESOPs or RSUs in wages. FAQ 3 of 30 Dec 2025 excludes them. Fix: keep equity and variable pay in a separate plan document.
7. Keeping a 45 day full and final policy. Section 17(2) requires final wages within two working days. Fix: prepare the settlement before the last working day.
8. Ignoring the cost plus invoice. Higher gratuity and PF raise the cost base of a captive subsidiary. Fix: revise the intercompany budget and mark up.

Checklist

1. List every employee with each pay head, the state of work and whether the person is a worker or a manager.
2. Tag each head against clauses (a) to (k) of section 2(y), and mark special allowances as disputed.
3. Compute total remuneration with employer PF and statutory bonus, and without gratuity, ESI and reimbursements.
4. Calculate Code wages under the ministry reading and the text reading.
5. Choose a salary design and model its income tax effect for each employee.
6. Issue 21 days' notice of change to workers under section 40 of the IR Code.
7. Update the PF ceiling to INR 25,000 from 17 Sep 2026 and solve wages and PF together for staff below the ceiling.
8. Retest ESI coverage and bonus eligibility on Code wages.
9. Order a revised gratuity valuation that uses last drawn Code wages for every year of service.
10. Move the pay date to the 7th of the next month or earlier, and plan final wages within two working days.
11. Reissue appointment letters in the form your state prescribes, with the clauses in the table above.
12. Revise the intercompany budget and transfer pricing mark up for the new cost base.
13. Add the bonus date, eight months from year end, to your 2026-27 compliance calendar.

To have us rerun this arithmetic on your structures, send one sample payslip per grade to our payroll management team.

Frequently Asked Questions

Is basic pay required to be 50 percent of CTC under the new labour codes?+

No. Section 2(y) of the Code on Wages, 2019 does not fix basic pay at any level. It adds back excluded items above half of total remuneration, and total remuneration excludes gratuity. Many employers set basic plus DA at half of total remuneration so that payroll needs no monthly add back.

Is special allowance part of wages under the Code on Wages?+

It is disputed. Section 2(y) excludes eleven named items, and special allowance is not one of them. On the text, it counts as wages in full. FAQ 4 of the ministry's FAQs of 30 Dec 2025 tests allowances together against 50 percent. Price both readings, or remove the special allowance from the structure.

Does employer PF count in total remuneration for the 50 percent test?+

Yes. Additional FAQ 1 of 16 Mar 2026 says employer PF and pension contributions and statutory bonus are included. Gratuity, ESI and other retirement benefits are not. Employer PF is excluded from wages under clause (c) of section 2(y), so it sits in the tested pool.

Are ESOPs and RSUs from a foreign parent counted as wages?+

No. The ministry's FAQ 3 of 30 Dec 2025 says ESOPs, performance based incentives, variable pay and reimbursements are not wages. RSUs granted by a US or UK parent do not raise PF, ESI or gratuity. They are taxed in India as a perquisite when the shares are allotted or transferred.

Does the 50 percent rule increase PF for every employee?+

No. Most employers restrict PF to the wage ceiling, which is INR 25,000 a month from 17 Sep 2026. For staff above the ceiling, employer PF stays at INR 3,000. The rule raises PF only where you pay PF on actual wages or Code wages fall below the ceiling.

How does the new wage definition affect ESI coverage?+

Additional FAQ 12 of 16 Mar 2026 applies Code wages to ESI from 21 Nov 2025, with the INR 21,000 limit unchanged. Code wages can be half of total remuneration, so employees with gross pay up to about INR 42,000 may now be covered. Retest each of them.

Is gratuity for past service calculated on the new wages?+

We price it that way for exits on or after 21 Nov 2025. Additional FAQ 17 says gratuity is based on the wages last drawn at exit under the Code on Social Security, 2020. The ministry does not say in terms how earlier years are treated. Because the formula multiplies last drawn wages by years of service, we reprice earlier service at the new wage base.

Who is eligible for statutory bonus under the Code on Wages?+

Under S.O. 4711(E) of 25 Aug 2026, an employee is eligible if wages do not exceed INR 21,000 a month. Section 26(1) also requires 30 days' work in the accounting year. Under S.O. 4710(E), bonus is computed as if wages were INR 7,000 a month, or the central minimum wage if higher. Section 41(2) applies the Chapter at 20 or more employees.

When must monthly salaries be paid under the Code on Wages?+

Before the end of the 7th day of the next month, under section 17(1) of the Code on Wages, 2019. The rule applies to every employee, including managers, because the Code has no wage ceiling. Additional FAQ 2 of 16 Mar 2026 confirms that the timely payment provisions cover all employees.

What is the deadline for full and final settlement under the Code on Wages?+

Wages are due within two working days of removal, dismissal, retrenchment, resignation or closure, under section 17(2). That includes HRA, conveyance and overtime under the second proviso to section 2(y). Gratuity follows within 30 days under section 56 of the Code on Social Security, 2020.

Has the Central Government fixed a national floor wage?+

Section 9 of the Code on Wages lets the Centre fix a floor wage based on minimum living standards. Rule 10 of the Code on Wages (Central) Rules, 2026 sets the method. We could not find a notification of an amount on the official pages we read. Check egazette.gov.in and labour.gov.in before relying on any figure. Until then, state minimum wages stay binding.

Do we need to give notice before restructuring salaries for the 50 percent rule?+

Yes, for the workers affected. Section 40 of the Industrial Relations Code, 2020 requires 21 days' notice before changing a Third Schedule condition, such as wages and allowances. Managers are outside the worker definition, but we give them the same notice.

What is the penalty for paying less than the wages due?+

A fine of up to INR 50,000 for a first offence under section 54(1)(a) of the Code on Wages. A repeat within five years can bring imprisonment of up to three months, a fine of up to INR 1,00,000, or both. Under section 45, the employee can also claim the shortfall with up to ten times compensation.

Sources

• Ministry of Labour and Employment, The Code on Wages, 2019 (Act 29 of 2019), https://www.labour.gov.in/static/uploads/2025/06/c328da14bbb15fc4ad571dc33e7a4ab3.pdf
• Ministry of Labour and Employment, FAQs on Labour Codes, 30 Dec 2025, https://www.labour.gov.in/static/uploads/2026/01/de4758d5bfeffc456d7de97a801891b0.pdf
• Ministry of Labour and Employment, Additional FAQs on Labour Codes (as on 16 Mar 2026), https://www.labour.gov.in/static/uploads/2026/03/a4ccf4c6d97c4f1f36a6d83f8c64213d.pdf
• Ministry of Labour and Employment, Compliance Handbook for Employers under the Four Labour Codes (Central Government Sphere), February 2026, https://www.labour.gov.in/static/uploads/2026/02/83978455025732b99b0165def80ab171.pdf
• Gazette of India, Code on Wages (Central) Rules, 2026, G.S.R. 343(E), 8 May 2026, https://www.labour.gov.in/static/uploads/2026/05/6eb0c35ba63b776487a025e5123b6b12.pdf
• Gazette of India, Occupational Safety, Health and Working Conditions (Central) Rules, 2026, G.S.R. 345(E), 8 May 2026, https://www.labour.gov.in/static/uploads/2026/05/ee246f790cad0b8e99c3828f34fa09a6.pdf
• Ministry of Labour and Employment, S.O. 4711(E) under section 26(1) of the Code on Wages (bonus eligibility), 25 Aug 2026, https://www.labour.gov.in/static/uploads/2026/09/1f92b29d09af1539e8cbe0c8acb7a52b.pdf
• Ministry of Labour and Employment, S.O. 4710(E) under section 26(2) of the Code on Wages (bonus computation), 25 Aug 2026, https://www.labour.gov.in/static/uploads/2026/09/3977906b27b1b53b9b98c245091b0726.pdf
• Ministry of Labour and Employment, The Industrial Relations Code, 2020 (Act 35 of 2020), https://www.labour.gov.in/static/uploads/2025/07/682a44b5426bff2c1f4943ee1b2fd566.pdf
• Ministry of Labour and Employment, The Occupational Safety, Health and Working Conditions Code, 2020 (Act 37 of 2020), https://www.labour.gov.in/static/uploads/2025/07/36fcfa5d8e6b9145e282bf7b950d6c47.pdf
• Ministry of Labour and Employment, Annual Report 2025-26, https://www.labour.gov.in/static/uploads/2026/06/4b7ec0e8206aa4860576d6f75b432e97.pdf
• Ministry of Labour and Employment, S.O. 5109(E) under section 2(89) of the Code on Social Security (wage ceiling INR 25,000), 17 Sep 2026, https://www.labour.gov.in/static/uploads/2026/09/2b0f1dbbd3769fc388416186ec145328.pdf
• Lok Sabha, Unstarred Question 3467 on minimum wages and the national floor wage, answered 10 Aug 2026, https://sansad.in/getFile/lsapps/loksabhaquestions/annex/188/AU3467_JgOe35.pdf
• Press Information Bureau, Government Makes the Four Labour Codes effective to Simplify and Streamline Labour Laws, 21 Nov 2025, https://www.pib.gov.in/PressReleasePage.aspx?PRID=2192463
• Press Information Bureau, Code on Wages, 2019 backgrounder, 23 Nov 2025, https://static.pib.gov.in/WriteReadData/specificdocs/documents/2025/nov/doc20251123703501.pdf
• Press Information Bureau, EPFO Raises Wage Ceiling from Rs. 15,000 to Rs. 25,000 (S.O. 5109(E)), 23 Sep 2026, https://www.pib.gov.in/PressReleasePage.aspx?PRID=2313829
• Employees' Provident Fund Organisation, FAQs on Revision of EPFO Statutory Wage Ceiling, September 2026, https://pmvbry-cdn.epfindia.gov.in/wp-content/uploads/2026/09/EPFO_Wage_Ceiling_FAQs.pdf