India’s salary structure rules are set to undergo a significant transformation as the Ministry of Labour and Employment has released detailed draft rules under the new Labour Codes. Along with the draft, a comprehensive set of FAQs has also been issued to remove long-standing confusion around wages, allowances, provident fund (PF) and gratuity. These clarifications are expected to impact the monthly income, retirement benefits and overall financial planning of millions of salaried employees, contract workers and employers across the country.
The draft rules aim to clearly define how salaries will be structured under the new system, what will qualify as “wages”, how the much-discussed 50 percent rule will work, and how gratuity will be calculated going forward.
The central government has consolidated 29 existing labour laws into four comprehensive Labour Codes. These include the Code on Wages, Industrial Relations Code, Social Security Code, and the Occupational Safety, Health and Working Conditions Code. The objective is to simplify labour laws, bring uniformity in definitions and enhance social security coverage for workers.
One of the biggest issues earlier was the lack of a consistent definition of “wages”. Different laws treated basic pay, dearness allowance and total salary differently, leading to ambiguity. The new Labour Codes introduce a single, standard definition of wages that will apply uniformly across all four codes.
The labour ministry has pre-published the draft rules to invite public feedback. Stakeholders have been given 45 days to submit suggestions and objections, while a 30-day window applies to Industrial Relations Rules. The government has clarified that during the transition period, existing rules will continue to apply until the new ones are formally notified, as long as they do not conflict with the Labour Codes.
One of the most important changes lies in how wages are defined. Under the draft rules, wages will include basic pay, dearness allowance (DA) and retaining allowance, if any.
A crucial provision, commonly referred to as the “50 percent rule”, has also been clearly explained. According to this rule, wages must constitute at least 50 percent of an employee’s total remuneration. If allowances exceed 50 percent of the total salary, the excess amount will be added back to wages.
This effectively prevents companies from keeping basic salary artificially low while paying a large portion of compensation as allowances to reduce statutory contributions. As a result, PF and gratuity calculations are likely to increase for many employees.
Consider an employee with a total monthly salary of ₹76,000. If basic pay and DA together amount to ₹20,000 and the rest is paid as various allowances, the new rules apply.
Fifty percent of ₹76,000 is ₹38,000. This means allowances can be a maximum of ₹38,000. If allowances are ₹40,000, the excess ₹2,000 will be added to wages. The revised wage component would then be ₹22,000, and PF and gratuity will be calculated on this higher amount.
The draft rules also clarify which payments will remain outside the definition of wages. These include performance-linked incentives, ESOPs, variable pay and reimbursement-based payments. Leave encashment has also been excluded from allowances. This clarity addresses long-standing disputes between employers and employees over salary components.
Gratuity has emerged as one of the most discussed aspects of the new Labour Codes. Under the draft rules, gratuity will now be calculated based on the “last drawn wages” rather than just basic pay. Since wages are subject to the 50 percent rule, the gratuity base is expected to rise automatically for many employees.
This change is particularly beneficial for employees whose earlier salary structures were heavily skewed towards allowances.
The draft makes it clear that the new gratuity provisions will apply prospectively from November 21, 2025, which is the effective date of the Code. Employees leaving their jobs on or after this date will be eligible for gratuity under the new framework.
Gratuity will be payable upon termination of employment, retirement, resignation, death or permanent disability, completion of a fixed-term contract, and other cases notified by the government. In special situations such as death, disability or fixed-term employment, the five-year continuous service condition will not apply.
According to FAQs issued by the Institute of Chartered Accountants of India (ICAI), fixed-term employees will now become eligible for gratuity after completing just one year of service. Earlier, five years of continuous service was mandatory. This is a major relief for contract-based workers.
The revised wage definition and gratuity norms will increase gratuity liabilities for companies. Employers will need to reflect these higher obligations accurately in their financial statements. ICAI has clarified that increased gratuity liabilities for employees leaving after November 21, 2025, must be recognised in the relevant accounting period.
The draft rules also strengthen overtime regulations. Employees working more than 48 hours a week will be entitled to double wages. Continuous work beyond 10 days will not be permitted without a mandatory rest day. Additional provisions include annual medical check-ups for certain age groups, childcare-related allowances and travel benefits for inter-state migrant workers.
In simple terms, the new Labour Codes aim to make salary structures more transparent and socially secure. While immediate take-home pay may not rise significantly, long-term benefits such as PF and gratuity are expected to improve, strengthening financial security during retirement and job transitions.
