Under the Central Government’s new Labor Code 2025, significant changes have already been made to monthly salaries. This historic rule is set to completely transform your salary structure. The new rule now mandates every employee’s basic salary to be at least 50% of their total CTC (Cost to Company). This major change will directly impact your monthly in-hand salary, which may decrease immediately, but its long-term benefits, such as PF and gratuity, will significantly increase. Learn how this visionary rule will impact your financial planning.
Why will the basic salary be 50%
The primary objective of the new Labor Code is to unify the definition of wages across the country. This unprecedented step by the government has been taken to ensure uniform calculation of gratuity, pension, and other social security benefits.
Under the new rule, ‘salary’ will only include basic pay, dearness allowance (DA), and retaining allowance. If an employee’s salary in this category is less than 50% of their CTC, companies will be required to increase it to 50%. With this increase in basic salary, deductions such as Provident Fund (PF) and gratuity will also increase proportionately.
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Regulations on Bonuses and Incentives
Significant changes may also be made to the rules regarding bonuses and incentives. According to labour law experts, if a bonus or incentive is a permanent part of the employee’s terms of employment, it will be considered part of ‘salary.’
However, if the bonus is given entirely at the company’s discretion, i.e., is a discretionary bonus, it will not be included in ‘salary.’ This nuance will allow companies to revise allowances to balance the salary structure in accordance with the new rules.
Impact on Leave Encashment Calculation
The new rule may also impact leave encashment, i.e., leave payments. Since this amount is typically received upon leaving a job or at the end of the year, it will be excluded from the definition of ‘salary.’
However, if a company provides leave encashment on an annual basis, it may be considered part of ‘salary.’ The government may issue further, clearer guidelines in this regard to avoid confusion between companies and employees.
What will be the immediate impact on employees
This powerful change will have an immediate impact on employees’ pockets.
Positive Impact
There will be a significant increase in PF, gratuity, and other long-term benefits. Employees will receive a larger corpus at retirement, ensuring financial security.
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Negative Impact
An increase in basic salary will also increase PF and other deductions, resulting in an immediate reduction in the monthly in-hand salary.
Companies cannot reduce CTC, but they may try to reduce or revise bonuses, incentives, and allowances to balance expenses. This will force employees to strike a balance between immediate benefits (monthly salary) and retirement benefits (gratuity, PF).