New Wage Code 2026: What It Means for Payroll & Compliance

India's four labour codes — the Code on Wages, the Industrial Relations Code, the Code on Social Security, and the Occupational Safety, Health and Working Conditions Code — consolidate close to thirty older labour laws into a single framework. They took effect from November 2025, and the part that affects payroll most directly is a single change: a new, standardized definition of “wages.”

This isn't a new tax or a new deduction. It's a rule about how CTC has to be structured, and it has a knock-on effect on PF, gratuity and take-home pay. Rules under this framework are still being finalized at the state level in places, so treat this as a working guide and confirm the current position for your state and industry before making structural changes.

The core change: the 50% wage rule

Under the new definition, “wages” must include at least 50% of an employee's total remuneration as basic pay plus dearness allowance. If the remaining allowances — HRA, special allowance, and similar components — push above 50% of CTC, the excess is added back into “wages” for the purpose of statutory calculations. In effect, a CTC that's heavily weighted toward allowances to keep basic pay (and therefore PF) low no longer works the way it used to.

What this actually changes for payroll

Provident Fund

PF contributions are calculated on basic pay plus DA. Since the new wage definition raises the effective basic pay for many salary structures, PF contributions — both employee and employer share — increase correspondingly for employees whose CTC was previously structured around a low basic component.

Gratuity

Gratuity is calculated using basic pay plus DA as well, so the same restructuring that affects PF also increases gratuity liability for employers, since it's based on a higher wage figure than before.

Take-home pay

Because a larger share of CTC is now routed into statutory deductions rather than paid out directly, monthly take-home pay can go down even though CTC hasn't changed — an outcome that catches employees off guard if HR hasn't communicated it ahead of a payroll change.

What HR and payroll teams need to do

• Review existing salary structures for how much of CTC currently sits in basic pay plus DA
• Restructure salary components that fall below the 50% threshold, in line with current guidance for your state
• Recalculate PF and gratuity liability under the revised wage figures before rolling out changes
• Communicate take-home pay changes to employees before payroll reflects them, not after
• Keep salary structure logic centralized, so the rule is applied consistently rather than case by case

How this fits into Manitham HRMS

Salary structures in Manitham HRMS are configured centrally, so a wage-definition change like this is applied consistently across every employee rather than adjusted one payroll run at a time. Statutory deductions — PF, ESI, professional tax and TDS — are then calculated automatically against the current structure. See how this works in payroll software or how compliance tracking works more broadly in HR compliance.