An HR manager at a mid-sized IT company in Noida called us last month with a specific problem. Her company had been running payroll the same way for seven years. Salary structure was well-designed, PF was being deducted correctly, bonus was being paid on time. Everything looked fine. Then a labour law consultant told her that under the 4 labour codes, their entire CTC structure might need to be redesigned. The consultant also warned that PF liability could increase significantly once the codes were fully notified in their state.
She was not sure what was true, what was speculation, and what was actually law right now. That confusion is extremely common. The 4 new labour codes in India are real, consequential, and already partially in force. The implementation timeline, however, has been uneven across states, and the misinformation around them is significant.
Specifically, this guide explains exactly what the 4 labour codes are, which ones affect salary structure and payroll the most, what changes for PF, gratuity, and bonus, and what HR teams need to do right now to stay compliant and avoid surprises.
Not sure how the 4 labour codes affect your CTC structure and payroll? Futurex reviews your existing salary structure and identifies exactly what needs to change, before a compliance gap surfaces. First review is free.
What Are the 4 New Labour Codes in India?
The 4 labour codes are the result of a long-pending reform in Indian labour law. Before these codes, India had 44 separate central labour laws, each with its own definitions, thresholds, compliance requirements, and enforcement machinery. For companies operating across multiple states, navigating this system was genuinely difficult.
Consequently, the government consolidated all 44 of those laws into four comprehensive codes. Importantly, this consolidation was not cosmetic. It involved changes to definitions, thresholds, and compliance obligations that materially affect how businesses run payroll and manage employees.
| Code | Laws Consolidated | Key Change |
|---|---|---|
| Code on Wages, 2019 | Minimum Wages Act, Payment of Wages Act, Payment of Bonus Act, Equal Remuneration Act | Wages must be at least 50% of total CTC |
| Industrial Relations Code, 2020 | Industrial Disputes Act, Trade Unions Act, Industrial Employment (Standing Orders) Act | Fixed-term workers get same benefits as permanent staff |
| Social Security Code, 2020 | EPF Act, ESI Act, Gratuity Act, Maternity Benefit Act, EDLI Scheme | Gig and platform workers covered; gratuity changes |
| OSH Code, 2020 | Factories Act, Contract Labour Act, Inter-State Migrant Workmen Act, 10 others | Standardised working hours, overtime, leave across sectors |
⚠ Implementation status as of March 2026: All four codes were passed by Parliament and received Presidential assent. Central government has notified the rules. However, labour is a concurrent subject, which means states must also frame and notify their own rules before the codes become fully enforceable. As of early 2026, implementation remains state-specific and is still in progress across most states. Businesses should prepare now so they are not caught off-guard when their state notifies.
The Single Biggest Change: The 50% Wage Rule Under the Code on Wages
Of all the changes brought by the 4 labour codes, this one has the most direct and widespread impact on payroll. The Code on Wages defines “wages” to include basic pay and dearness allowance and requires that these wages constitute at least 50% of the total remuneration paid to any employee.
This single rule changes the game for most companies in India. Specifically, here is why.
Over the past two decades, Indian companies developed CTC structures where the basic salary was kept low , often 30% to 40% of total CTC , and a large portion was paid as allowances: HRA, conveyance, special allowance, LTA, medical allowance, and so on. This structure reduced the PF contribution base, reduced gratuity liability, reduced bonus calculation base, and often reduced income tax burden for employees. Everyone understood the intent, and it became standard practice.
Under the Code on Wages, that structure is no longer permissible. Wages (basic + DA) must be at least 50% of total remuneration. Consequently, for any company currently running a 30% or 35% basic salary structure, the entire CTC design needs to change.
What Counts as “Wages” Under the New Definition?
The Code on Wages defines wages as all remuneration including basic pay, dearness allowance, and retaining allowance. Notably, it also includes certain other allowances that exceed half of total remuneration. The following components are specifically excluded from the definition of wages: HRA, conveyance allowance, overtime allowance, bonus, commission, and gratuity.
In practice, this means that if a company pays an employee a total CTC of Rs. 10 lakh per year, the combined basic salary and dearness allowance must be at least Rs. 5 lakh per year, which works out to at least Rs. 41,667 per month. Any structure where basic is below this threshold will need to be revised.
A Concrete Example of How CTC Changes
| CTC Component | Current Structure | Under 4 Labour Codes |
|---|---|---|
| Basic Salary | Rs. 25,000 (35%) | Rs. 35,000 (50% minimum) |
| HRA | Rs. 15,000 | Rs. 10,000 |
| Special Allowance | Rs. 25,000 | Rs. 20,000 |
| Other Allowances | Rs. 5,000 | Rs. 5,000 |
| Gross Monthly CTC | Rs. 70,000 | Rs. 70,000 |
| PF Contribution (12%) | Rs. 3,000 | Rs. 4,200 |
| Annual Gratuity Accrual | Rs. 14,423 | Rs. 20,192 |
| Employee Take-Home | Higher (lower deductions) | Lower (higher PF deduction) |
⚠ The take-home problem: When basic salary increases from 35% to 50% of CTC, the employee’s PF deduction increases. Their monthly take-home salary goes down, even though the CTC is exactly the same. Many companies that implemented this restructuring had to communicate the change carefully to employees who were surprised to see lower in-hand salaries. Proactive communication before the change is essential.
How the 4 Labour Codes Change PF Calculations
Currently, employers calculate the Employees Provident Fund contribution at 12% of basic salary and dearness allowance. Under the existing structure, where basic is kept at 30% to 40% of CTC, the PF base is correspondingly low. When the 4 labour codes mandate that wages (basic + DA) must be at least 50% of total CTC, the PF calculation base increases proportionately.
For employers, therefore, this means both the employer’s contribution and the employee’s contribution increase. As a direct result, the employer’s PF cost rises. The employee’s take-home salary goes down. For companies with large workforces, the aggregate impact on payroll costs can be significant.
PF Impact Example for a Company with 100 Employees
Consider a company where employees average a CTC of Rs. 8 lakh per year. Currently, basic salary is Rs. 20,000 per month (30% of gross Rs. 66,667). Once the 4 labour codes take full effect, basic salary must reach at least Rs. 33,333 per month (50% of Rs. 66,667).
Current employer PF contribution per employee per month: 12% of Rs. 20,000 = Rs. 2,400. Under the new structure: 12% of Rs. 33,333 = Rs. 4,000. The increase per employee per month is Rs. 1,600. For 100 employees, the additional monthly employer PF cost is Rs. 1,60,000, which equals Rs. 19.2 lakh per year in additional PF costs alone. For a company with 500 employees, this figure reaches approximately Rs. 96 lakh annually.
⚠ PF cap consideration: Currently, The ceiling caps PF contributions at 12% of Rs. 15,000 per month (Rs. 1,800 employer contribution) for employees earning above the statutory wage ceiling, unless the employer opts for higher contributions. The interaction of the 50% wage rule with the PF wage ceiling is an area that requires careful legal review, as different payroll setups will be affected differently.
How the 4 Labour Codes Change Gratuity Calculations
Under current rules, gratuity is calculated as (Last drawn basic salary / 26) x 15 x Number of years of service. Currently, because basic salaries are kept low in most CTC structures, gratuity payouts are correspondingly lower than they would be if calculated on full salary.
Under the new labour codes, when basic salary increases to at least 50% of CTC, the gratuity base increases by the same proportion. For a long-serving employee, this can make a substantial difference to the total gratuity payout.
Fixed-Term Employees and the Gratuity Change Under the Industrial Relations Code
Notably, the Industrial Relations Code brings an important change to gratuity eligibility that affects companies using fixed-term employment. Currently, gratuity requires at least 5 years of continuous service. Consequently, most companies do not accrue gratuity liability for short-tenure or fixed-term employees.
Under the Industrial Relations Code, fixed-term employees earn gratuity on a pro-rata basis, even without completing 5 years. A fixed-term employee who works for 1 year, 2 years, or 3 years will be entitled to proportionate gratuity at the end of their contract. Companies that rely heavily on fixed-term employment now carry a significant new liability that rely heavily on fixed-term employment arrangements.
How the 4 Labour Codes Change Bonus Calculations
Additionally, the Payment of Bonus Act is consolidated under the Code on Wages. The bonus calculation methodology under the current Act uses a capped wage of Rs. 7,000 per month or the applicable minimum wage (whichever is higher) as the calculation base.
Under the 4 labour codes, since “wages” are redefined and the 50% rule applies, the interaction between the bonus calculation base and the new wage definition will need to be re-evaluated once the Code on Wages rules are fully notified in each state. Companies that currently keep basic salary below Rs. 7,000 per month for lower-wage workers may see their bonus calculation base change.
For a complete breakdown of how statutory bonus is currently calculated and what the eligibility criteria are, refer to our detailed guide on the Payment of Bonus Act India.
What the Social Security Code Changes for Gig and Platform Workers
The Social Security Code brings gig workers and platform workers under a statutory social security framework for the first time. This is a landmark change that affects companies in the logistics, food delivery, e-commerce, and technology sectors that use platform-based workers at scale.
Under the Code, the government can frame schemes for gig workers covering life and disability cover, accident insurance, health and maternity benefits, old age protection, and other benefits. The funding for these schemes will come from contributions by the aggregator platforms. While the specific contribution rates and schemes the government is still framing, companies that deploy large numbers of gig workers need to monitor this closely as implementation proceeds.
Working Hours, Overtime and Leave: What the OSH Code Changes
The Occupational Safety, Health and Working Conditions Code standardises working hours, overtime rates, and leave entitlements across sectors. Some of the practical changes for HR teams include the following.
Working Hours
The OSH Code sets a standard of 8 working hours per day and 48 hours per week. The OSH Code caps overtime at 2 hours per day. Notably, the Code introduces the concept of flexible shift arrangements. Under this provision, states can allow 12-hour shifts with adequate compensatory rest , which has implications for manufacturing and IT/BPO sectors that operate long or rotating shifts.
Leave Entitlements
Under the OSH Code, workers earn leave eligibility after 180 days of work in a year (reduced from 240 days under the existing Factories Act). Additionally, the Code standardises the maximum carry-forward accumulation limit for earned leave. Workers who leave employment can claim encashment of accumulated leave, which creates a leave encashment liability that HR teams must account for.
Overtime Rate
The OSH Code mandates overtime payment at twice the ordinary rate of wages. Importantly, the calculation base for overtime is now linked to the new definition of wages. Under the Code on Wages, this base must be at least 50% of CTC. As a result, the effective overtime cost per hour increases when basic salary increases under the 50% rule.
Fixed-Term Employment Under the Industrial Relations Code: A Major Shift
The Industrial Relations Code formally introduces fixed-term employment as a statutory category in Indian labour law. This is significant because previously, fixed-term contracts existed as a contractual arrangement without clear statutory backing.
Under the Code, a fixed-term employee receives the same working conditions, wages, allowances, and other statutory benefits as a permanent employee doing the same work. Specifically, the fixed-term employee receives ESI, PF, gratuity on a pro-rata basis, and maternity benefits. The fixed-term employee also cannot be converted to contract or casual status in order to avoid these entitlements.
For companies in manufacturing, retail, and project-based industries that rely heavily on seasonal or project-based hiring, this change requires a rethink of how they structure short-term workforce arrangements and account for the statutory liabilities they now carry.
What HR Teams Must Do Right Now
Given the trajectory of implementation, companies in most states have a window of time to prepare. The preparation, however, cannot be deferred indefinitely. Here is what the HR and payroll function should be doing right now.
Step 1: Audit Your Current CTC Structures
To begin, pull a report of all employee CTC structures and calculate the current ratio of basic salary to total CTC for each grade and band. Identify which employee categories currently have basic below 50% of CTC . These are the structures that will need redesign.
Step 2: Model the PF and Gratuity Impact
Next, for each affected employee category, model the new PF contribution and gratuity accrual under a 50% basic structure. Compute the aggregate additional cost to the employer per month and per year. Present this to leadership with clear scenario options, addressing whether the additional cost is absorbed by the employer, restructured within the existing CTC, or addressed through other means.
Step 3: Plan the Employee Communication
The 50% wage rule will reduce take-home salaries for most employees, even if the CTC stays the same. This requires careful communication , explaining why the change is happening, the change is happening, what the regulatory basis is, and how the employee’s long-term benefits (higher PF accumulation, higher gratuity payout) are actually better. A company that implements this change without advance communication will face significant employee relations problems.
Step 4: Update Payroll Systems and Offer Letters
Once leadership approves the restructuring, furthermore, payroll software must be updated to reflect the new salary components. HR teams must issue all future offer letters using the compliant structure. Legal teams may need to add addendums to existing employee agreements. HR teams must update the information system to reflect the new statutory definitions consistently.
Step 5: Track State Notifications
Labour falls on the Concurrent List. States must therefore notify their own rules before the codes become enforceable in those states. Finally, track when your specific states of operation notify the rules. The preparation done in Steps 1 to 4 ensures that implementation can happen quickly once the state notification is issued, rather than scrambling at the last minute.
⚠ Why preparation cannot wait: Companies that wait until their state formally notifies the rules will have very little time to restructure CTC, update payroll systems, communicate with employees, and revise offer letters simultaneously. The businesses that handle this transition smoothly are the ones preparing now. The ones that scramble are the ones who read the notification and realise they have 30 days to implement years of accumulated non-compliance.
How the 4 Labour Codes Affect Different Industries
Importantly, the impact of the 4 new labour codes is not uniform across sectors. Some industries face much higher exposure than others, based on their existing CTC structures and workforce composition.
| Industry | Primary Impact | Exposure Level |
|---|---|---|
| IT and Software | High allowance-heavy CTC structures; PF cost increase significant | High |
| Manufacturing | OSH Code changes for shift hours; fixed-term gratuity | High |
| Startups and SMEs | Often have low basic structures; cash flow impact of higher PF | High |
| Retail and FMCG | Fixed-term seasonal workers now get statutory benefits | Medium-High |
| Logistics and Delivery | Gig worker social security contributions under Social Security Code | Medium-High |
| Banking and Finance | Already compliant in most areas; Social Security Code additions minimal | Lower |
Common Misconceptions About the 4 Labour Codes
Because implementation has been slow and uneven, consequently a significant amount of misinformation has built up around the 4 labour codes. Employers raise these misconceptions most frequently.
Misconception 1: The codes are not applicable yet, so we do not need to act
This is technically partially true today. However, it is dangerous as a planning assumption. Parliament has passed all four codes. The central government has notified the rules. State implementation is a matter of when, not if. Companies that use “not yet applicable” as a reason to defer preparation will be in the same position as those who ignored GST compliance until the last month before implementation.
Misconception 2: PF will be calculated on full CTC
This is not what the codes say. PF will continue to be calculated at 12% of basic salary and DA . The change is that basic salary and DA must now constitute at least 50% of total remuneration. The government does not levy PF on gross CTC.
Misconception 3: All employees will see their take-home reduce significantly
This depends entirely on the current salary structure. Employees whose basic salary is already at or above 50% of CTC will see no change at all. Only employees whose basic falls below 50% of CTC face any impact. Furthermore, the reduction in take-home is a function of the size of the gap . A company restructuring from 40% to 50% basic will see a smaller impact than one restructuring from 25% to 50%.
Misconception 4: The codes only affect large companies
The 4 new labour codes in India apply based on headcount thresholds that are generally lower than most people assume. The Code on Wages, for instance, applies to all establishments. The Social Security Code applies to businesses above specified thresholds that are broadly similar to the current EPF and ESI thresholds. Startups and SMEs are not exempt.
How Futurex Helps Companies Prepare for the 4 Labour Codes
In practice, Futurex has been helping companies across India audit their CTC structures, model the compliance cost of the 4 labour codes, and prepare for implementation since the codes were first passed. The work typically involves four components.
First, a complete audit of existing salary structures across all employee grades to identify the extent of the 50% wage gap. Second, a financial model showing the exact PF, gratuity, and bonus cost implications for the specific workforce. Third, a restructuring recommendation that achieves compliance while minimising disruption. Fourth, updated payroll configuration and offer letter templates ready for implementation once the state notification is issued.
Furthermore, this preparation work connects directly to Futurex’s broader statutory compliance management services, which ensure that when the codes are notified in a client’s state, the transition is seamless rather than reactive. For companies that also need payroll restructuring support, the payroll management team handles the system configuration, revised payslip formats, and employee communication. Additionally, companies reviewing their overall payroll compliance posture alongside the Labour Code changes often find other compliance gaps that are resolved simultaneously.
Frequently Asked Questions About the 4 Labour Codes
Are the 4 labour codes already in force in India?
All four Labour Codes have been passed by Parliament and received Presidential assent. The central government has notified the rules. However, because labour is a concurrent subject under the Constitution, states must also notify their own rules before the codes become fully enforceable. As of early 2026, most states are still in the process of framing and notifying state rules. Implementation is therefore ongoing and state-specific. Companies should prepare now rather than wait for the final state notification.
What is the 50% wage rule under the Code on Wages?
The Code on Wages defines “wages” as basic salary plus dearness allowance, and requires that this amount constitute at least 50% of the total remuneration paid to an employee. Allowances such as HRA, conveyance, and special allowance are excluded from this definition. Companies that currently run salary structures with basic below 50% of CTC will need to restructure to comply with this rule.
How much will PF contributions increase under the 4 labour codes?
PF will continue to be calculated at 12% of basic salary and DA. The increase occurs because the 50% wage rule directly raises the base on which PF is calculated. For example, if an employee’s basic increases from Rs. 20,000 to Rs. 35,000 per month to meet the 50% threshold, the employer PF contribution increases from Rs. 2,400 to Rs. 4,200 per month , which is an increase of Rs. 1,800 per employee per month.
Do fixed-term employees get gratuity under the new labour codes?
Yes. Under the Industrial Relations Code, fixed-term employees are entitled to gratuity on a pro-rata basis from the first year of service , without needing to complete the usual 5 years of continuous service. This is a significant change for companies that use fixed-term contracts and have not been accruing gratuity for such workers.
Will the 4 labour codes reduce employee take-home salary?
For employees whose basic salary is currently below 50% of CTC, yes . Restructuring will increase their PF deduction, which reduces monthly take-home. The CTC itself does not change, but the split between take-home and statutory deductions shifts. Long-term, the employee benefits from higher PF accumulation and higher gratuity payout. Clear communication before implementation is essential to manage this transition smoothly.
What should HR teams do to prepare for the 4 labour codes right now?
Specifically, HR teams should begin with a complete audit of existing CTC structures to identify the wage gap across employee grades. Then model the additional PF, gratuity, and bonus costs under a compliant structure. Prepare a restructuring proposal for leadership review. Draft the employee communication plan. Update payroll system configurations. Track state-level notifications for each state of operation so that implementation can be executed promptly when the notification is issued.
Not Sure How the 4 Labour Codes Affect Your Payroll? Futurex Can Tell You Exactly.
Futurex reviews your existing salary structures, calculates the exact PF, gratuity, and bonus impact of the 4 new labour codes, and gives you a clear restructuring plan before your state notifies. We serve businesses in Noida, Delhi NCR, and across India. First review is completely free.