India’s salary structure is set for a major overhaul as the Code on Wages—part of the government’s sweeping labour law reforms—comes into effect. One of the biggest consequences for employees will be an increase in Provident Fund (PF) and gratuity contributions, which will reduce take-home pay even as long-term retirement savings rise.
Under the Code on Wages, the “basic salary” component must constitute at least 50% of an employee’s total cost to company (CTC) or a percentage that the government may notify. The shift has been aimed at correcting a long-standing practice in Indian companies: keeping basic pay artificially low while inflating allowances to reduce statutory retirement payouts.
Why Basic Salary Matters
Basic salary will form the foundation for all major statutory benefits, including PF and gratuity. The PF contribution alone is calculated as 12% of the basic pay, while gratuity is computed based on the final drawn basic pay and years of continuous employment.
With the new rules mandating a higher basic component, both employers and employees will now contribute more to PF and gratuity. This means two things simultaneously:
Retirement Corpus to gradually increase
The new changes will offer long-term financial security, though monthly in-hand salaries will shrink since PF contributions will rise within the same CTC structure. The Code officially came into effect on November 21, but companies will receive the detailed rules within 45 days. Once notified, establishments will have to reconfigure their salary structures to comply.
Ensuring Fairness Plugging Loopholes and
Experts note that the provision is designed to discourage companies from cheating the system by reducing basic pay and inflating reimbursements or allowances. One of the biggest changes in the new labour framework will be the uniformity and definition of wages across all codes. This ensures consistency in how social security benefits are calculated.
Stronger Retirement Safety Nets
While employees might initially feel the pinch of reduced in-hand salaries, industry experts argue that the reforms strengthen long-term financial well-being and streamline India’s fragmented labour laws.
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