On November 21, 2025, the government of India announced that the four labour codes are being implemented from that date.
These include the code of wages, 2019, the industrial relations code, 2020, the code on social security, 2020, and the occupational safety, health and working conditions code 2020.
These four codes aim to consolidate as many as 29 previous acts/labour laws.
Though these four codes have been deemed effective from the date mentioned earlier, the government has stated that the corresponding rules, regulations and the relevant schemes is likely to be operational from April 1, 2026. During the transition period, the existing labour laws would be in force.
These labour codes are very wide in their ambit and cover a whole host of industrial relations, employee/worker salaries, social security benefits, worker safety, hiring/firing norms, union formation, equality in pay for women and their participation in the workforce and many more aspects.
From a personal finance angle, the most important parts in these labour codes pertain to how the basic pay definition, gratuity, provident fund deduction etc, change and how employers may restructure salaries.
We factor in all the changes indicated in the labour code and illustrate with examples on how your pay is likely to change, how your provident fund contributions are set to increase and what your gratuity payouts are likely to be. Fixed-term employees are also given a host of benefits, which we highlight here. In addition, we look at a few other points from the code that could have a monetary impact on contract, informal and gig workers.
Finally, we also give suggestions on how to manage cashflows and modify your investment portfolio if the code adversely impacts your take-home pay.
Redefining the basic salary
For most of the salaried, much of their hikes, provident fund deductions etc depended on how their basic pay was structured as a part of the overall salary.
The new labour code (code of wages) has mandated that basic salary, comprising basic pay, dearness allowance and any retaining allowance must add up to at least 50 per cent of the overall salary. There was no such mandate until now on how the basic pay is structured.
Many companies, especially those that gave more by way of allowances, have only 30-40 per cent of their employees’ overall salary as basic pay.
Perhaps, the most critical part from a personal finance angle is how the new labour code affects individual salary structures, employees’ provident fund deductions and the pre-tax net salary after the new labour code has taken effect.
Now, the primary change in the salary calculations would involve how the basic pay is arrived at.
In general, the total salary is arrived at by adding a various components. The first is the basic pay and dearness allowance. Then there are the house rent, special, leave travel and other allowances.
Finally, there are the retiral parts that include the company’s contribution to the EPF and also to the payment towards gratuity.
The basic pay and house rent allowance (and any retaining allowance, if offered) are mandated to be at least 50 per cent of the total salary.
All retiral deductibles are based on the basic pay calculation.
This can be illustrated with an example (see table).
Now assume a person earns a total salary of ₹25 lakh per annum. In the present salary structure, we assume 35 per cent of the total salary to be basic pay (along with DA and any retaining allowance) currently, which comes to ₹8.75 lakh per annum.
Since the new labour code is in force, we need to take 50 per cent of total salary as the basic pay, which would come to ₹12.5 lakh.
Now, EPF contributions of self and that of the company come to 12 per cent each of the basic pay. In the old code, the amount would be ₹1.05 lakh each for both contributions.
With the new labour code, the EPF deductions would rise to ₹1.5 lakh each (12 per cent of Rs 12.5 lakh), an increase of ₹45,000 each compared to the earlier code’s outflows.
Gratuity (calculations will be discussed separately) in the earlier regime would come to ₹42,088. In the new labour code, the gratuity amount would be ₹60,125 per year.
From the total salary, the company’s and personal contributions to EPF are deducted, as is the gratuity contributions to arrive at the net salary.
In the old code, the net salary before tax would come to around ₹22.48 lakh, while the figure would be about ₹21.4 lakh according to a salary structured according to the new labour code.
The difference in net salary (pre-tax) between the old and new labour codes would be ₹1.08 lakh per annum.
When the example is repeated with a person earning ₹15 lakh per annum, the difference in net salary (pre-tax) comes to ₹64,823.
Thus, the new labour code would mean lower in-hand salary if implemented as such and your employer restructures your pay components.
One aspect — on the salary structures that are more complex — needs mentioning here. There is still clarity awaited on whether bonuses not linked to compensation, commissions, performance-related payouts or incentives would have to be clubbed with the total salary for the purpose of calculating the basic pay. For our calculations, we have excluded these and focused on regular salary structures.
Another key point to understand is that the 12 per cent deduction in EPF is compulsory only for those earning a monthly basic pay of up to ₹15,000. However, most companies tend to make employees contribute 12 per cent of basic pay and themselves match it with a corresponding payment. Some firms do not go beyond the legally stipulated limit of ₹1,800 a month (12 per cent of ₹15,000), so as to keep the in-hand salary at a higher level for employees.
Therefore, employers paying higher salaries can opt not to restructure salaries or make higher EPF contributions.
Gratuity increases
As a means of rewarding employees who stick around for a reasonably long period, companies were expected to reward them suitably when they moved out elsewhere or retired.
Now, this gratuity amount again is calculated based on the basic salary.
The formula for gratuity is: (last drawn annual basic salary/12)*(number of years of service)*15/26
The number 12 in the formula above comes in for converting annual salary to the monthly amount.
Then, the number 15 refers to half a month, assuming a total of 30 days. Finally, 26 days refer to the number of working days in a month.
Up until now, gratuity was offered only to employees who have put in at least five or more years of service. Those who quit before five continuous years of service aren’t paid the amount.
However, the new labour code (code on social security) has made it clear that gratuity must be paid to all fixed-term employees after one continuous year of service in the company.
This change marks a dramatic departure from the earlier regime and now even shorter tenors in the era of job hopping would earn you a gratuity pay out.
The formula, though, remains the same as earlier for the calculation of the gratuity amount. But, as the basic pay calculation is set to change, your gratuity, too, would increase.
This can be explained with an example of a person earning a total salary of ₹15 lakh per annum (see table).
Earlier, no gratuity was payable till the end of the fifth year of service. So, at the end of year five of continuous service in a company, a fixed-term employee quitting the firm would get a little over ₹1.26 lakh.
With the new code in place, a person with the same ₹15 lakh annual pay would receive ₹36,075 even if she quits after one year of service. At the end of five years, at the same ₹15 lakh pay, the gratuity pay out would be a bit more than ₹1.8 lakh, more than ₹54,000 higher than what becomes payable under the old code.
One clarification is awaited on gratuity. Currently, the tax-free limit for gratuity payout across all employments is restricted to ₹20 lakh for private sector employees and ₹25 lakh for government staff. With gratuity becoming payable from the end of year one and with the enhanced basic pay calculation, gratuity payouts are likely to increase. It remains to be seen if the ceiling would remain or be enhanced later. Also, the labour code gives this benefit of gratuity after one year to fixed-term employees. It is not clear if permanent employees would be treated at par with fixed-term employees and offered the same benefit.
Other notable code changes
One key change pertains to benefits offered to fixed-term (contractual) employees. These fixed-term staff were not entitled to any EPF, ESIC or gratuity benefits. Now the new code on social security specifies that all benefits must be offered to fixed-term employees as well. In fact, the code also says pay must be on par with that of permanent employees and gratuity is to be paid after one continuous year of service.
All employees above the age of 40 must be given a free annual health check-up by the employer. This would be extremely helpful for employees to take care of any health issues promptly and also enhance their own health insurance to make it more robust in case these checkups reveal potential ailments, so that any waiting periods can be quickly completed.
Aggregators who employ gig and digital platform workers are expected to earmark 1-2 per cent of their revenues (capped at 5 per cent of total worker payouts) for the social security (health insurance, accident cover etc.) of these workers.
In the new code, all overtime work required by employers must have the consent of the concerned employees and should be compensated. The labour code states that overtime wages must be paid at 2x the normal wage rate.
Women are allowed to work in night shifts across industries, provided they give their consent for the same, going by the new labour code norms. Arranging for their safety is the employer’s responsibility while working in night shifts.
The labour code also states that a new national floor wage would be set, below which no company or establishment can pay its workers.
An interesting point in the labour code (industrial relations code,2020) is that companies must set up a reskilling fund for workers. This must be equivalent to 15 days’ wages of the workers.
Each of these measures, while providing better social security coverage to employees and greater options to women in the workforce, is expected to increase the wage bill of companies.
Now, in this age of hiring and firing, market forces of demand/supply/business dynamics determine recruitment and retrenchment. The labour code has increased the threshold for seeking government approval for letting go employees from 100 to 300, which is expected to benefit start-ups and small-medium enterprises to have nimble operations without too much of a compliance burden.
Sorting personal finances
If your employer does make changes to your salary structure and you end up with a lower in-hand pay, you will need to work on your cashflows and tweak your investments a bit.
Receiving a lower in-hand pay will mean that you will first have to stabilise your cashflows for a few months to ensure any tight situations are avoided.
Take the case of the person earning ₹25 lakh salary. The pre-tax net salary is lower by as much as ₹1.08 lakh annually, which is approximately ₹9,000 a month. In the case of a person earning ₹15 lakh, the net salary becomes lower by around ₹5,500 a month.
You can consider restructuring some of your payments towards certain financial products.
For example, in case you are paying premiums for any life insurance policy (term cover) or health cover on a monthly basis, you could shift them to the annual mode, perhaps to coincide with the time of your yearly bonus. You can check with your insurers on how and when you could do it without any loss of coverage.
For a brief while, you could tap into your emergency fund, if any, and replenish it once your cashflow stabilises after a pay hike.
Another aspect to note with the new labour code is that considerable sums are being ploughed to your retirals. And both the (enhanced) EPF and gratuity are defined benefits.
Since these are essentially fixed income in nature, you can consider them as part of your debt portfolio. EPF, in fact, offers 8.25 per cent interest, almost 175 basis points more than the 10-year G-Sec yield.
You can, therefore, cut back on any debt or hybrid fund investments, especially if you have 15-20 or more years of service and are investing in these funds via the SIP mode. Directing your SIPs to large-cap, flexi-cap, large- & mid-cap or multi-cap schemes based on your risk appetite may work better if you are aged 45 or less and considering a regular retirement at 60.
The idea is to get a tad more aggressive with your equity portfolio given that a compulsory debt portfolio is getting built at work.
Published on December 6, 2025
