Salary Structure Under the New Labour Codes: What HR Must Check in 2026.
Your employee's CTC may not have changed. But the way you calculate "wages" might.
For years, many salary structures kept basic pay low and moved the rest into allowances. It looked tidy on the offer letter, and it kept PF and gratuity calculations small. The new labour codes have put that habit under review. If your structure still follows the old formula, HR teams now need to check it.
This guide explains the 50% wage rule in plain language, with worked examples, and ends with a checklist and answers to common questions.
1. What changed?
India's four new Labour Codes took effect on 21 November 2025, and the Code on Wages brings in one common definition of "wages". The Code on Wages (Central) Rules, 2026 were notified on 8 May 2026, which added more detail on how the Code is applied.
Before, different laws used different meanings of the word. Now one definition of wages is used across PF, gratuity, bonus, retrenchment compensation, leave encashment and maternity benefit. So how you define "wages" in your payroll matters far more than it used to.
Some state rules are still being finalised, so check what applies in your state.
2. What is the 50% rule?
Wages mainly means basic pay, dearness allowance (DA) and retaining allowance. Some payments, such as HRA, conveyance, overtime and bonus, are kept outside this definition.
The rule is that these excluded payments can make up only half of the total remuneration. If they go over 50%, the excess is added back to wages.
A simple example: An employee's monthly pay is ₹50,000. Half of that is ₹25,000. So excluded components can be at most ₹25,000. Anything beyond that is treated as wages.
3. Which salary components are included?
Included in wages:
- Basic pay
- Dearness allowance (DA)
- Retaining allowance
Usually kept outside wages (the "excluded" components):
- House rent allowance (HRA)
- Conveyance allowance
- Overtime
- Commission
- Statutory bonus
- Employer contributions to PF and pension
- Gratuity paid on termination and retrenchment compensation
Two things to remember:
- The 50% rule does not mean basic salary must be 50% of CTC. It works on the legal definition of wages and the list of excluded components.
- Whether a particular allowance in your structure counts as an excluded component depends on what it is and how it's described in the rules. Confirm this with your labour-law advisor before you restructure.
4. What happens when allowances cross 50%?
For this example, we assume HRA and the other allowances count as excluded components.
Before:
- Basic + DA: ₹20,000
- HRA: ₹10,000
- Other allowances: ₹20,000
- Total: ₹50,000
Excluded components are HRA + other allowances = ₹30,000, which is 60% of the total. The limit is 50%, which is ₹25,000. The excess is ₹30,000 − ₹25,000 = ₹5,000.
After:
- Wages = ₹20,000 + ₹5,000 = ₹25,000 (50% of ₹50,000)
The employee's gross pay is still ₹50,000. But for statutory purposes, the wage base has moved from ₹20,000 to ₹25,000.
5. Does this affect PF, gratuity and bonus?
Yes, because the same wage definition feeds these calculations. Here is what happens in the example above.
Provident Fund (PF): Employee and employer PF are each 12% of wages. If PF is calculated on actual wages, it moves from ₹2,400 to ₹3,000 per month on each side, a rise of ₹600. If you contribute only on the capped statutory wage limit, the change may not show. Check how your company contributes, and read our guide on the EPFO wage ceiling.
Gratuity: The formula is 15 days of wages for each year of service, calculated as wages × 15 ÷ 26. For one year, it moves from ₹11,538 to ₹14,423. For an employee with 5 years of service, that's about ₹57,692 before and ₹72,115 after.
Bonus, leave encashment and overtime: Because the same wage definition is used across these, they can be affected too.
What it means for the employee: if gross pay stays the same, a higher PF deduction can reduce take-home. For many mid-salary employees the monthly dip is around 3-5%, but it depends entirely on the existing salary structure. The money isn't lost. It moves into PF and gratuity.
6. What should HR check?
Work through it in this order:
- Salary breakup: list each component for every salary band. Mark which are wages and which are excluded.
- Payroll settings: check that each component is set up the way you intend, and that nothing is mapped wrongly.
- Statutory calculations: make sure PF, gratuity, bonus and leave encashment use the right wage base.
- Employee records: compare each employee's current structure with the revised one, and keep a record of who has been updated.
- Documents: update offer letters, salary revision letters and payslips so they match.
7. Example salary structure
Here is a realistic ₹40,000 monthly package.
Old structure:
- Basic: ₹14,000 (35%)
- HRA: ₹7,000
- Other allowances: ₹19,000
- Total: ₹40,000
Excluded components are ₹26,000, which is 65%. The limit is ₹20,000. The excess is ₹6,000, so wages become ₹14,000 + ₹6,000 = ₹20,000.
Revised structure:
- Basic: ₹20,000 (50%)
- HRA: ₹8,000
- Conveyance and other allowances: ₹12,000
- Total: ₹40,000
Excluded components are ₹20,000, exactly 50%. The salary slip now shows the wage base clearly, and there's nothing left to add back.
Try your own numbers with the free Salary Calculator.
8. What this means for businesses
Payroll cost: A higher wage base can mean higher PF contributions and a bigger gratuity provision. The effect is small per employee, but it adds up across a team of 50 or 500.
Take-home pay: Some employees will see a small drop in monthly pay unless you adjust the structure. Explain this early, so it doesn't come as a surprise on pay day.
Compliance: If your payroll is still on the old formula, contributions and benefits may be calculated on the wrong base. It's easier to correct this now than during an audit.
Planning: Model the cost before you change anything. Build the numbers first, then rewrite the structure.
9. How Pletox helps
Once you decide your structure, you need payroll to apply it correctly for every employee, every month.
- Payroll & Salary Rules lets you set up salary components, allowances and deductions, so the structure is applied the same way for each employee.
- The free Salary Calculator lets you test a breakup and see the take-home before you finalise it, and the Payslip Generator helps you prepare a clear payslip.
- Salary Details Lock (new in Pletox 3.0) locks the salaries of active employees so they can't be changed by mistake once you've finalised them.
- People & Onboarding keeps employee records in one place, so you can see who is on which structure.
Your salary rules are set up and reviewed with you during implementation. To see how this would work for your team, book a demo. You can also check our HR Glossary for plain-language explanations of terms like gratuity and DA.
10. Final checklist for HR
Check these 5 things:
✅ Is your wage base at least 50% of total remuneration once the excess is added back?
✅ Are your payroll components mapped correctly as wages or excluded components?
✅ Do PF, gratuity and bonus use the same wage base?
✅ Have you updated every employee record, and kept a note of the changes?
✅ Have you updated offer letters, salary letters and payslips, and told employees what changes in their take-home?
Frequently Asked Questions
1. What is the 50% wage rule under the new labour codes?
The Code on Wages sets one common definition of wages. The 50% rule says that excluded payments, like HRA and conveyance, can make up at most half of the total remuneration. Anything above that is added back to wages.
2. Does basic salary have to be exactly 50% of CTC?
Not exactly. The rule works on the legal definition of wages and the excluded components. Basic pay, DA and retaining allowance count as wages, and the test is whether your excluded components cross half of the total. Check your own structure with your advisor.
3. Will my take-home salary go down?
It can, if your gross pay stays the same. A higher wage base means higher PF deductions, so the monthly dip can be small for many employees, depending on the existing structure. The amount isn't lost, because it moves into PF and gratuity. You can test your own numbers with the free Salary Calculator.
4. Does the 50% rule affect PF, gratuity and bonus?
Yes, because the same wage definition is used across them. If the wage base rises from ₹20,000 to ₹25,000, PF at 12% moves from ₹2,400 to ₹3,000 a month on each side, if it's calculated on actual wages. Gratuity rises too. If you contribute on the capped wage limit, the PF change may not show, so read our guide on the EPFO wage ceiling.
5. How can Pletox help me update my salary structure?
With Payroll & Salary Rules, you can set up salary components, allowances and deductions, and they're applied the same way for every employee. The new Salary Details Lock then protects finalised salaries from accidental changes. To see how this works for your team, book a demo.
This article is general information and not legal advice. Rules can differ by state and may be updated, so please confirm the details with your labour-law advisor or chartered accountant.