There was confusion for a long time regarding the salary, PF and gratuity of employed people in India. The reason was four new labor codes, which had become laws but their rules were not fully implemented. Now the government has tried to solve this problem to a great extent. The Labor Ministry has made public the draft rules and related questions and answers i.e. FAQs under the new labor codes. Through these draft rules, the government has clearly indicated how your salary will be made in the future, what will be considered as salary and on what basis gratuity will be calculated.
These changes will affect crores of employees, including salaried people, contract and fixed term employees. Companies will also have to make major changes in their salary structure and accounting.
Till now in India, the definition of salary was different in different labor laws. Somewhere only the basic salary was important, somewhere DA was added and somewhere the entire salary was taken as the basis. For the first time in the new labor codes, a uniform definition of salary has been set for the entire country, which will be applicable to all laws. The government believes that this will end confusion and employees will get more social security.
It has been said in the draft rules that the salary will mainly include basic pay, dearness allowance i.e. DA and retaining allowance. Along with this, an important rule has been added, which is now being called 50 percent rule in common language. According to this rule, the share of allowance in the total salary of any employee cannot be more than 50 percent.
Suppose your total salary is 60 or 70 thousand rupees, but the basic salary is very less and the remaining money is shown in different allowances. Now the new rule says that only half of the salary will be considered as salary. If companies show more allowance, then the amount above 50 percent will be automatically added to the salary. Its direct benefit will be that PF and gratuity will be calculated on the higher amount.
Till now many companies deliberately kept the basic salary low so that the burden of PF and gratuity is reduced. After the new rules it will become difficult to do this. This is the reason why the government is calling this change a big step in the interest of the employees.
It has also been made clear in the draft which payments will not be considered part of the salary. Performance linked incentives, ESOPs, variable pay and reimbursement of expenses will not be included in the salary. Regarding leave encashment, it has also been made clear that it is not a part of the allowance. This has ended the ongoing debate between companies and employees to a great extent.
Most of the discussion is taking place regarding gratuity. In the new system, gratuity will no longer be calculated only on the basic salary, but on the basis of the last salary received. Because the definition of salary has now become larger, the gratuity of employees whose salary was allowance-heavy may automatically increase.
It has also been made clear in the draft that the new rule of gratuity will not be applicable from a later date. This arrangement will be considered effective from 21 November 2025. That means, those employees who leave the job or retire after this date will get gratuity under the new rules.
A major change has also emerged for fixed term and contract employees. According to the new FAQs, fixed term employees will no longer have to wait for five years. If his contract is completed, he will be entitled to gratuity only after one year of service. This change has brought relief to lakhs of employees who work on one-two year contracts.
For companies, these changes mean increasing costs and new accounting responsibilities. Gratuity liability may now be higher and companies will have to reflect it in their financial accounts timely. If an employee leaves the company after November 21, 2025, the effect of his increased gratuity will be visible in the accounts of the same year.
Strict provisions have also been made in the draft regarding overtime. If you work more than 48 hours a week, you will have to pay double wages. Work cannot be done without a break for a long time and giving rest will be mandatory. In some sectors, rules related to medical check-up for elderly employees and crèche for children have also been added.
Overall, the objective of the new labor codes is to make the salary system transparent. There may not be much difference in take-home salary initially, but in the long run, PF, gratuity and retirement benefits will be stronger. At present these rules are draft and it is possible to change them after suggestions, but it is certain that in the coming time, the game regarding salary and gratuity is going to change completely.
