The Ministry of Labour has pre-published draft rules under the new labour codes and invited public comments. Once the codes are implemented, they are expected to alter salary structures, take-home pay, gratuity and the taxable components for salaried employees. While monthly take-home pay may marginally decline, provident fund (PF) contributions and gratuity payouts are likely to rise, leading to a higher retirement corpus over time.
FAQs released by the Ministry of Labour and Employment on December 30, 2025, clarified that if payments or allowances—other than basic pay, dearness allowance (DA) and retaining allowance—exceed 50% (or such percentage as may be notified) of total remuneration, the excess amount will be added to “wages”.
Therefore, as long as allowances other than basic pay, DA and retaining allowance remain within 50% of total remuneration, no additional amount will be included in “wages” for the purpose of retirement contributions and benefits.
“Companies may need to relook at their salary structures, as some allowances may fall outside the excluded allowances under the definition of wages. This could result in higher gratuity provisions, which will need to be accounted for in the current year’s financials,” said Anshul Jain, National Leader – Regulatory, PwC India.
Currently, many companies calculate PF contributions only on basic pay, while some also include DA, where applicable—typically a small portion of total compensation. Under the new labour codes, any allowance exceeding 50% of pay will be treated as wages, thereby expanding the PF contribution base. This will increase both employer contributions and employee deductions, reducing monthly take-home pay but strengthening long-term retirement savings.
“With the Codes introducing a harmonised and more expansive definition of wages, the PF contribution base becomes broader (subject to statutory thresholds). As a result, fixed-term employees stand to accumulate higher retirement savings over the course of their engagement,” said Pooja Ramchandani, Partner, Shardul Amarchand Mangaldas & Co.
Experts noted that if the basic salary is increased to 45–50% of cost-to-company (CTC), house rent allowance (HRA)—which is calculated as a percentage of basic pay—would also rise. However, a higher basic pay component could have tax implications, particularly for employees opting for the old tax regime.
“Under the old tax regime, an increase in basic salary and, consequently, HRA allows employees to claim a higher HRA exemption, subject to conditions such as rent payment and documentation,” said Tarun Garg, Director – Tax, Deloitte Haskins & Sells LLP.
He added that employees’ PF contributions qualify for deduction under Section 80C of the Income-tax Act, 1961 (or Section 123 of the Income-tax Act, 2025). With higher PF contributions—if employees choose to contribute on the revised ‘wages’—they can avail higher tax deductions, subject to the overall limit of Rs1.5 lakh.