In 2025, the Indian government made a major change to labor laws, deciding to abolish 28 old laws and implement only 4 new labor codes. These four codes will be considered effective from November 21, 2025, and will be fully implemented from the financial year 2026. These new laws will directly impact employees’ salaries, provident fund (PF), pension, social security, and workplace safety regulations.
Which New Labor Codes Will Be Implemented?
The four labor codes implemented by the government are the Code on Wages 2019, the Industrial Relations Code 2020, the Social Security Code 2020, and the Occupational Safety, Health and Working Conditions Code 2020. Their objective is to make the wage system transparent and provide greater social security to employees.
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What is the 50 Percent Salary Rule?
Under the new labor codes, an important rule has been set regarding the salary structure. According to this rule, an employee’s basic salary, dearness allowance, and other fixed allowances combined must constitute at least 50 percent of the total salary or the company’s total cost (CTC). This means that companies will no longer be able to keep the basic salary low by showing excessive allowances.
Impact on Allowances and Take-Home Salary
The remaining 50 percent of the salary will include HRA, bonus, commission, overtime, and other allowances. If these allowances exceed the prescribed limit, the excess amount will be added to the salary. This may change employees’ take-home salary, as an increase in basic salary will also lead to increased PF and other deductions. However, the government has clarified that employees can continue with PF deductions based on a basic salary of ₹15,000; any further deductions will depend on their discretion.
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Impact on PF, Pension, and Gratuity
After the implementation of the 50 percent salary rule, employers will have to increase the basic salary and dearness allowance. This will directly impact social security schemes such as PF, gratuity, and pension. In the future, employees may receive greater benefits at retirement, although currently, increased deductions could result in a lower take-home salary.
Why tax liability might increase
Chartered accountants believe that the restructuring of salaries could lead to an increase in taxable income. Allowances that were previously used for tax savings may now become part of the basic salary. This could increase tax liability under the Income Tax Act and limit tax planning options.