The new Labour Code, which was notified recently, has for the first time introduced a single, universal definition of wages. The long-awaited clarification is expected to significantly impact salary structuring, social security contributions, and compliance obligations for both employers and employees.
The new definition is designed to harmonise decades of inconsistencies in how wages were interpreted under various labour laws, ranging from provident fund and gratuity to bonus and maternity benefits.
Under the revised definition, wages include basic pay, dearness allowance, and retaining allowance—forming the core compensation payable in monetary terms for work performed. However, the code also lists several components that will not be considered part of wages, including bonus (not part of employment terms), employer PF or pension contributions, HRA, conveyance allowance, overtime, commission, gratuity, retrenchment compensation, and the value of certain amenities like housing, water, light, or medical attendance.
50% cap
A key reform is the introduction of a 50% cap on excluded allowances. If allowances such as HRA, overtime, and commission together exceed 50% of an employee’s total remuneration, the excess amount will automatically be added back to wages.
This is expected to curb the long-standing practice of companies keeping the basic pay low and allocating a larger portion of salaries under allowances to reduce statutory liabilities like provident fund contributions.
Pooja Ramchandani, Partner at Shardul Amarchand Mangaldas & Co., said the change would be far-reaching, especially for senior employees. “The key implication of the revised definition of wages will be in relation to the manner in which the salaries of employees, especially higher-level employees, are structured. It is market practice to keep the basic pay of employees low, with a larger portion of the salary being categorised as other remuneration... With the advent of the Code, one will need to ensure that allowances forming part of the exclusions do not exceed 50%,” she said.
She added that companies will need to reassess current salary structures. “Employers should review their current wage structures to examine whether there is a need to revise the components to minimise financial outlay in calculation of benefits,” she said.
Boost to gender pay equity
The code also embeds a progressive provision to strengthen gender pay parity. For determining equal wages to all genders, allowances such as HRA, conveyance allowance, overtime allowance, and remuneration arising from legal settlements must be counted as part of wages. This expands the scope of what can be considered when assessing whether men, women, and transgender employees are being paid equally for equal work.
Uniformity across PF, gratuity, overtime and leave
Another major shift is that this new wage definition will now apply uniformly across all labour codes and associated regulations, increasing clarity and reducing compliance disputes for companies.
Sudhakar Sethuraman, Partner at Deloitte India, noted that the change would lead to higher social security benefits for workers. “Under the new labour codes, one of the most significant changes is the uniform definition across all regulations—be it for PF, leave salary, overtime, and gratuity.” He pointed out that this would likely increase long-term benefits for employees. “This means the wage considered for various compliances is now uniform and will have increased financial impact vis-à-vis the old regulations. In a way, the new wage definition brings out higher retirement contributions and stronger social security benefits, thereby ensuring financial security for the sunset years of the employees.”
With the government’s notification setting the stage for implementation, companies are now expected to undertake a detailed review of payroll structures to ensure compliance. While the shift may increase immediate financial outflows for employers, it is widely seen as a step toward improved transparency, stronger worker protection, and a more stable long-term social security framework.