The four labour codes came into force on 21 November 2025. For payroll, the change that matters most is the new definition of "wages" in the Code on Wages: if the allowances and other excluded items add up to more than half of total pay, the excess is treated as wages. Wages are the base for PF and gratuity, so a salary structure that was fine last year can now understate both.
Facts checked: 16 October 2026. The 21 November 2025 date and the list of four codes come from the Government's own PIB release. The detail of the wage definition and the 50% test comes from consultancy and payroll-vendor commentary; we did not read the statute text. Rules under the codes are still being notified, and the labour ministry's FAQ says the old rules stay in force until the new rules are notified, to the extent they are in line with the codes. Sources differ on operational rollout: some say rule-based PF, ESI and procedural provisions follow later (around April 2026), so check what applies to you. We did not find the PIB release or the text of Section 2(y) on a re-check on 17 October 2026, so the excluded-items list rests on secondary commentary. Confirm the wording of Section 2(y) and your state's rules before you act on a number below.
What changed, in plain words
The Code on Wages, the Industrial Relations Code, the Code on Social Security and the Occupational Safety, Health and Working Conditions Code replaced a group of older central labour laws from 21 November 2025.
For payroll, the working rule is this:
- Wages include basic pay, dearness allowance and retaining allowance.
- Certain items are left out, such as house rent allowance, conveyance, overtime, commission, statutory bonus and the employer's own PF contribution.
- If the left-out items together are more than 50% of total remuneration, the amount above 50% is added back and counted as wages.
So an employee with a ₹1,00,000 monthly package and ₹30,000 as basic, with the other ₹70,000 in excluded allowances, has ₹20,000 added back. Wages become ₹50,000, not ₹30,000.
Why an auditor or CFO should care
Provident fund. If PF is calculated on a basic that is lower than the new wage base, contributions may be short. Where the company pays PF on the full wage base today, the cost goes up from the restructure, and take-home pay falls unless the package changes.
Gratuity. The same wage base drives the gratuity liability. A larger wage base means a larger provision. This reaches the financial statements through the actuarial valuation, so it is not only a payroll matter.
Back-dated exposure. Some commentators say every employee below 50% basic is potentially non-compliant from 21 November 2025. That is an interpretation and not a settled position, and the rules and any clarifications may change it. Treat it as a risk to size, not a number to book.
What to re-test in payroll
Do this on the full payroll, not a sample. The 50% test is a calculation on every employee, every month.
- The 50% test per employee. Total remuneration, the excluded components, and whether they pass 50%. List the employees who fail, by grade and by state.
- PF wage base against the new wage. Compare the PF contribution actually deducted with what the new wage base implies. Separate the shortfall that comes from the ceiling from the shortfall that comes from the wage definition.
- Gratuity inputs. Check that the wage used in the valuation and the provision matches what payroll now treats as wages. Our gratuity calculator and EPF contribution calculator help with spot checks.
- State layers. Professional tax slabs, Labour Welfare Fund contributions and minimum wages are state matters, and the state rules under the codes are still arriving. Use the professional tax calculator and the LWF calculator, and keep a dated record of which rule version each month used.
- Changes that came from a restructure. Where a company changed salary structures after November 2025, check that the change is documented and that the arrears, if any, were computed.
- Manual overrides. Any month where a payroll operator changed a computed figure by hand needs a reason on file.
Where companies with their own payroll engine get caught
Companies that built their own payroll software, or run several states through one engine, face a specific risk: the engine applies the rule once, and nobody re-computes it independently. A second, read-only layer that recomputes gross-to-net from the raw inputs before the bank file is generated finds the gap between what the engine paid and what the rules say. We describe the approach in multi-state payroll compliance and independent verification, and the full audit scope in payroll audit automation for PF, ESI and TDS.
What is still unsettled
- Rules. Central and state rules under the codes are still being notified. Until then, the labour ministry's FAQ says old rules continue where they are consistent with the codes. A state that has not notified yet leaves a gap that employers have to fill with a reasoned position.
- Interpretation. Courts and regulators have not settled several points, including how far back the wage definition reaches.
- Practice. Many consultancy articles describe what employers are doing. That is not law. When the statute and a blog disagree, the statute wins.
Frequently Asked Questions
When did the new labour codes come into force?
On 21 November 2025, when all four codes were brought into force together.
What is the 50% wages rule?
If the components excluded from "wages" together exceed 50% of total remuneration, the excess is added back and treated as wages. The excluded items include HRA, conveyance, overtime, commission, statutory bonus and the employer's PF contribution.
Does the 50% rule mean basic pay must be 50% of salary?
In effect, for PF and gratuity purposes, yes: wages cannot fall below half of total remuneration. Whether a company restructures pay or accepts a higher PF and gratuity cost is a commercial choice.
Is there a penalty for getting this wrong?
The codes provide penalties, and PF dues carry interest and damages. We did not verify the amounts for this guide. Check the current provisions for your case.
Does this change how an auditor reports?
It can. A material PF or gratuity shortfall may need a provision or disclosure, and the auditor will look at whether management has a documented position. This is for the engagement partner to judge.
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Statutory facts on this page are checked against their sources, and the page says where it relied on secondary reporting. How we verify · Report an error