New Labour Codes in India: Wages, Gratuity, PF Rules

India's labour law changed more in the past year than in the previous seventy. The four labour codes Parliament passed in 2019 and 2020 sat on the shelf for five years. On 21 November 2025 the Central Government brought all four into force, replacing 29 central labour laws, from the Minimum Wages Act and the Payment of Gratuity Act to the Factories Act and the Industrial Disputes Act. The final central rules followed on 8 May 2026, and the EPF wage ceiling was raised on 17 September 2026.

For an employer, this is not a change of names. The way wages are defined has changed, and with it the base for gratuity, provident fund, bonus and overtime. This guide explains what is in force, the dates that matter, what each code changes, and what a company should do now.

When did the new labour codes come into effect?

All four codes came into force on the same day, 21 November 2025, by notifications S.O. 5319(E) to S.O. 5322(E). The timeline since then:

Until the final rules under a code are notified by the government that regulates you, the Ministry's FAQs confirm that the old rules continue under section 6 of the General Clauses Act, 1897, to the extent they are consistent with the codes. The codes themselves, including the new wage definition, apply from 21 November 2025.

Which laws do the four labour codes replace?

State shops and establishments Acts, such as the Delhi Shops and Establishments Act, 1954, are state laws and are not replaced. A shop, office or IT company still registers and follows working-hour rules under its state's Act.

What is the new definition of wages and the 50% rule?

This is the change that affects almost every payroll. Under the Code on Wages, "wages" means all remuneration, and specifically includes basic pay, dearness allowance and retaining allowance. A list of items is excluded, such as house rent allowance, conveyance, statutory bonus, overtime, commission and the employer's PF contribution.

The catch is the proviso. If the excluded payments together exceed 50% of total remuneration (or another percentage the government notifies), the excess is added back to wages. In practice, basic pay plus DA can no longer be kept artificially low with large allowances. The Ministry's FAQs confirm that:

• the same definition applies across all four codes, so it drives gratuity, PF, ESI, bonus, overtime and leave encashment calculations;
• gratuity and retrenchment compensation are not counted when testing the 50% limit;
• performance-based incentives, ESOPs, variable pay and reimbursements are not wages;
• leave encashment is not treated as an allowance.

A worked example

Take an employee with a monthly cost to company of ₹1,00,000, structured as:

Excluded allowances add up to ₹70,000, which is 70% of remuneration. The limit is 50%, or ₹50,000, so the ₹20,000 excess is added back. Wages for statutory purposes become ₹50,000, not ₹30,000.

That matters most for gratuity. After five years, gratuity at 15 days' wages a year works out to about ₹1,44,231 on wages of ₹50,000 (50,000 × 15 ÷ 26 × 5), against about ₹86,538 on basic pay of ₹30,000. The same higher base applies to PF where contributions are paid on actual wages.

How does gratuity change under the Code on Social Security?

• Fixed-term employees get gratuity after one year of continuous service, instead of five, on a pro-rata basis. Under the central rules, a part year of six months or more after the first year counts as a full year.
• Gratuity is calculated on the new wage definition, so the 50% add-back increases the payout for most salaried staff.
• Effective date: the Ministry's FAQs state that the new gratuity provisions apply from 21 November 2025, the date the code came into force, and that companies should make provision as per accounting norms.
• Formula and ceiling are unchanged: 15 days' wages for each completed year (or part over six months), based on wages last drawn, up to the notified ceiling of ₹20 lakh. Five years' service is still needed for permanent employees except on death or disablement.
• Payable on: termination, superannuation, resignation, death or disablement, and expiry of a fixed-term contract.

Companies that prepare Ind AS or AS 15 accounts need a fresh actuarial valuation, because the higher wage base increases the defined benefit obligation. Many listed companies reported a one-time past service cost in the quarter ended December 2025 for this reason.

What changes for PF and ESI?

Provident fund. EPF now applies through the Code on Social Security, still to establishments with 20 or more employees. Two things change the numbers:

1. The wage base: PF is 12% of wages, and wages now follow the 50% rule. For an employee whose basic pay was below half of pay, PF on actual wages goes up, and take-home pay falls by the employee's share.
2. The ceiling: from 17 September 2026 the wage ceiling for mandatory coverage is ₹25,000 a month, up from ₹15,000 (unchanged since 2014). Employees earning between ₹15,000 and ₹25,000 who joined above the old ceiling now have to be enrolled, and where contributions were capped at ₹15,000 the cap is now ₹25,000 or actual wages, if lower. The government estimates over 51 lakh workers come under mandatory cover. EPFO regional offices have asked employers to update payroll from that date and enrol newly covered staff.

Where an employer only contributes on the statutory ceiling, the 50% rule makes little difference for employees earning well above ₹25,000. It matters for staff whose wages sit near or below the ceiling.

ESI. ESI coverage is now pan-India rather than limited to notified areas. It is mandatory for establishments with 10 or more employees, voluntary for smaller ones, and mandatory even with one employee in a hazardous process. The ESI wage limit for employee coverage continues to be set by notification.

What else changes under the Code on Wages?

• Minimum wages for everyone. The old Minimum Wages Act covered only scheduled employments, about 30% of workers. Every employee now has a statutory right to minimum wage, and no state can fix a minimum below the national floor wage set by the Centre.
• Payment deadlines for all employees, whatever their salary (the old Payment of Wages Act stopped at ₹24,000 a month): monthly wages by the 7th of the following month, and full and final settlement within two working days of resignation, removal or retrenchment.
• Overtime at twice the normal rate for all employees, with overtime capped at 144 hours a quarter under the central rules.
• Equal pay and no discrimination on gender in recruitment, wages and conditions, including against transgender persons.
• Bonus continues at a minimum of 8.33% and a maximum of 20% for eligible employees, now under the Code on Wages, with eligibility after 30 days of work in a year.
• Claims for unpaid dues can be filed up to three years later.

What changes under the Industrial Relations Code?

• Fixed-term employment is recognised for all sectors, with the same wages, hours and benefits as permanent staff doing similar work.
• Standing orders are needed only for industrial establishments with 300 or more workers (earlier 100). The central government's Model Standing Orders, 2026 have separate schedules for mining, manufacturing and services.
• Lay-off, retrenchment and closure need government permission only where 300 or more workers are employed (earlier 100); states can raise this further.
• Worker Re-Skilling Fund: on retrenchment, the employer pays 15 days' last drawn wages per worker into the fund, in addition to retrenchment compensation. Under the central rules this goes to the designated account within 10 days, and reaches the worker's bank account within 45 days.
• Grievance Redressal Committee for establishments with 20 or more workers, with women represented in proportion to the workforce; Works Committee for 100 or more.
• Strikes and lock-outs in any industrial establishment need 14 days' notice.

What changes under the OSH and Working Conditions Code?

• Appointment letters are mandatory for every employee, stating designation, wages and social security entitlements, in the format set by the rules.
• Free annual health check-up for employees aged 40 and above. The Centre launched a nationwide health check-up initiative through ESIC on 7 May 2026.
• Working hours: a normal working week of 48 hours, with daily limits set by the appropriate government.
• Women at night: women may work in all establishments and at night (before 6 a.m. and after 7 p.m.) with written consent, safe transport and other safeguards.
• Higher thresholds: a factory is one with 20 or more workers using power or 40 or more without (earlier 10 and 20). Contract labour licensing applies at 50 or more contract workers (earlier 20), and contractors can take a single licence for more than one state or all of India.
• Single registration for establishments with 10 or more workers, in place of separate registrations under several Acts.
• Annual leave after 180 days of work in a year, instead of 240.
• Principal employers must pay contract workers' wages if the contractor fails to, and provide welfare facilities such as drinking water, toilets and canteens where contract labour works on their premises.

What about gig and platform workers?

For the first time, the Code on Social Security defines gig workers, platform workers and aggregators. Aggregators such as ride-hailing and delivery apps must contribute 1% to 2% of annual turnover, capped at 5% of the amount paid to gig and platform workers, to a social security fund. Under the central rules, aggregators had to upload details of existing workers to the government portal within 45 days, and register new workers in real time. A worker qualifies for scheme benefits after 90 days with one aggregator or 120 days across several in the previous year.

Do central or state rules apply to my business?

The codes are central laws, but most of them are administered by the "appropriate government". For railways, mines, banks, insurance companies, telecom, airlines, major ports and central PSUs (and their contractors), that is the Centre, and the central rules notified on 8 May 2026 already apply. The central social security rules also cover establishments with branches in more than one state.

For most private businesses, such as a trading company, manufacturer, IT firm or startup in Delhi, Gurugram or Noida, the state government is the appropriate government for wages, OSH and industrial relations. States have been notifying their own final rules on different dates through 2026, and where a state's final rules are not yet in force, its old rules continue to the extent they are consistent with the codes. The codes themselves, including the wage definition, gratuity changes and payment deadlines, already bind every employer.

What should employers do now?

1. Recompute statutory wages for every employee using the 50% test, and decide whether to restructure CTC or accept higher PF and gratuity costs.
2. Get a fresh gratuity valuation on the new wage base, and record the past service cost from 21 November 2025 in your accounts.
3. Apply the ₹25,000 EPF ceiling from 17 September 2026: enrol newly covered employees and update ECR filings. Check if you qualify for employer incentives under the PM Viksit Bharat Rozgar Yojana.
4. Issue appointment letters in the prescribed format to anyone who does not have one.
5. Fix the payroll calendar so salaries go out by the 7th and full and final settlements within two working days.
6. Review fixed-term contracts for gratuity after one year and parity with permanent staff.
7. Check contractor arrangements: licences, wage payment evidence and facilities for contract workers on your premises.
8. Set up committees and registers: a grievance redressal committee if you have 20 or more workers, and a crèche or crèche allowance (at least ₹500 a month per child under the central rules) at 50 or more employees.
9. Track your state's rules for working hours, registration and returns, alongside your state's shops and establishments Act.

We help companies with payroll compliance, PF and ESI filings, gratuity provisioning and HR policy updates under the new codes as part of our accounting and bookkeeping and virtual CFO services.

Frequently asked questions

When did the four labour codes come into force?

On 21 November 2025. The Central Government notified the commencement of the Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020 and the Occupational Safety, Health and Working Conditions Code, 2020 on that date, replacing 29 central labour laws. The final central rules under all four codes were notified later, on 8 May 2026.

Are the new labour codes applicable to private companies?

Yes. The codes apply to every establishment, including private limited companies, LLPs, partnership firms and startups, subject to thresholds such as 20 employees for EPF and 10 for ESI. For most private businesses the state government frames the rules for wages, working conditions and industrial relations, so the detailed procedure depends on the state you operate in.

What is the 50% wage rule in the new labour codes?

Wages mean basic pay, dearness allowance and retaining allowance. If the allowances and other payments excluded from wages, such as HRA, conveyance and special allowance, exceed 50% of total remuneration, the excess is added back to wages. The higher figure is then used for gratuity, PF, bonus and other statutory calculations.

Is basic salary now required to be 50% of CTC?

Not in those words. The code does not force you to restructure basic pay. It says that for statutory purposes, excluded allowances above 50% of total remuneration are treated as wages anyway. Many employers raise basic pay to make the structure transparent, but leaving the structure unchanged still leads to the same higher statutory wage base.

Is HRA included in wages under the Code on Wages?

House rent allowance is in the list of exclusions, so it is not part of wages by itself. It does count towards the 50% test, though. If HRA together with other excluded payments is more than half of total remuneration, the excess over 50% is added back to wages for statutory purposes.

Are bonus, ESOPs and reimbursements part of wages?

No. The Ministry of Labour's FAQs say performance-based incentives, employee stock options, the variable part of pay and reimbursement-based payments are not wages. Statutory bonus is also excluded. Only fixed remuneration and the allowances caught by the 50% add-back form the wage base.

Will my take-home salary reduce under the new labour codes?

It can, if your employer pays PF on actual wages and your basic pay was well below half of your pay. The higher wage base increases the employee's 12% PF deduction and gratuity accrual, so cash in hand falls while retirement savings rise. Where PF is paid only on the ₹25,000 ceiling, the effect is small for higher earners.

Is gratuity under the new labour code applicable retrospectively?

No. The Ministry's FAQs state that the gratuity provisions of the Code on Social Security apply from 21 November 2025, the date it came into force. Employers should still provide for the higher liability as per accounting standards, because gratuity is paid on wages last drawn and covers the employee's full service.

Can I get gratuity after one year under the new labour code?

Only if you are a fixed-term employee. A fixed-term employee who works for at least one year under the contract gets gratuity on a pro-rata basis. A permanent employee still needs five years of continuous service, except where employment ends because of death or disablement.

What is the maximum gratuity limit under the new labour codes?

₹20 lakh, as notified by the Central Government. The formula remains 15 days' wages for every completed year of service, or part of a year over six months, based on wages last drawn. An employer can pay more under a contract, agreement or award.

What is the new EPF wage ceiling from September 2026?

₹25,000 a month, effective 17 September 2026, up from ₹15,000. Employees earning up to ₹25,000 must now be covered under EPF, EPS and EDLI in establishments with 20 or more employees, and where contributions were capped at the ceiling, the cap is now ₹25,000 or actual wages, whichever is lower.

Is it mandatory to give an appointment letter under the new labour codes?

Yes. The Occupational Safety, Health and Working Conditions Code makes it mandatory to issue an appointment letter to every employee, giving at least the designation, wages and social security entitlements, in the format prescribed by the rules. It also serves as proof of employment for social security and dispute purposes.

When must salary be paid under the Code on Wages?

Monthly wages must be paid before the end of the seventh day of the following month, and weekly or daily wages at the end of the week or shift. When an employee resigns or is removed, dismissed or retrenched, dues must be paid within two working days. These rules now cover all employees, whatever their salary.

What are the working hours under the new labour codes?

A normal working week of up to 48 hours. Daily limits are set by the appropriate government within the code, and overtime beyond normal hours must be paid at twice the ordinary rate. Under the central rules overtime cannot exceed 144 hours in a quarter.

Do fixed-term employees get the same benefits as permanent staff?

Yes. Under the Industrial Relations Code, a fixed-term employee must get the same hours of work, wages, allowances and other benefits as a permanent employee doing the same or similar work, at least in proportion to the service rendered, plus gratuity after one year. Employers cannot use fixed-term contracts to cut pay.

What is the Worker Re-Skilling Fund?

A fund under the Industrial Relations Code for retraining retrenched workers. An employer who retrenches a worker must pay 15 days' last drawn wages for that worker, on top of retrenchment compensation. Under the central rules the money goes into a designated account within 10 days and reaches the worker within 45 days.

Are state shops and establishments Acts replaced by the labour codes?

No. Shops and establishments Acts are state laws and were not among the 29 central laws replaced. A shop or office in Delhi still registers under the Delhi Shops and Establishments Act, 1954, and follows its rules on opening hours, holidays and leave, alongside the labour codes.

What happens if an employer does not comply with the labour codes?

The codes provide for fines and, for serious or repeat offences, imprisonment. Many first offences can now be compounded: by paying 50% of the maximum fine where only a fine applies, or 75% where imprisonment is also possible. Repeat offences within five years cannot be compounded, and inspections are now randomised and web-based.

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