New Labour Codes 2025: A Paradigm Shift in Salary and Benefits for Indian Employees
For salaried taxpayers in India, financial conversations have long revolved around tax outgo and the perennial choice between the new and old tax regimes. However, a significant transformation is on the horizon with the official notification regarding the implementation of the New Labour Codes, set to take effect from November 21, 2025. This development is shifting the focus towards core employee benefits, particularly gratuity and Provident Fund (PF), making them central topics in salary discussions across the country.
Redefining 'Wages': The Foundation of Statutory Benefits
A pivotal change introduced by the New Labour Codes is the revised definition of 'wages', which serves as the base for calculating statutory benefits. According to the new framework, wages encompass all forms of remuneration, including basic pay, dearness allowance, and retaining allowance. However, certain specified components are excluded from this definition. These exclusions include House Rent Allowance (HRA), conveyance allowance, the employer's contribution to the Provident Fund, housing and utilities, medical attendance, and other designated allowances.
Critical to note is the cap on these exclusions, which is set at 50% of the total remuneration. Any amount exceeding this 50% threshold will be added back to the wages. This adjustment has the potential to increase the gratuity payout under the Code on Social Security, 2020, as the base for calculation becomes broader and more inclusive.
Provident Fund Contributions: Why They Remain Largely Unaffected
Despite the expanded definition of wages, Provident Fund contributions are unlikely to see a significant increase for the majority of employees. This stability is attributed to several key factors:
- The Employees' Provident Funds Act continues to govern PF contributions, as it has not been repealed under the new codes.
- Contributions can still be calculated based on the statutory wage ceiling of ₹15,000 per month, which remains in effect.
- Even in cases where the basic salary exceeds this ceiling, employers may persist in contributing 12% of the basic pay, regardless of whether the 'wages' as defined under the new labour codes are higher.
This means that for most salaried individuals, their PF deductions will not experience a sudden spike, providing a sense of continuity in their long-term savings plans.
Gratuity Payouts: A Welcome Boost for Employees
Under the previous legal framework, gratuity was mandated to be calculated solely on 'basic salary' after an employee completed five years of continuous service, unless more favorable terms were offered by the employer. Many companies adhered to this practice, paying gratuity based on basic salary, which often constituted less than 50% of the total remuneration.
The new rules bring a substantial change. Since wages must now constitute at least 50% of the total remuneration, the base for gratuity calculation is elevated. This results in higher gratuity payouts for employees, enhancing their financial security upon retirement or resignation.
The Gratuity Formula: Same Structure, Enhanced Outcome
The formula for calculating gratuity remains unchanged: Gratuity = (15 / 26) × Last drawn monthly wages × Years of service. What alters is the 'last drawn monthly wages' component. With the revised wage definition ensuring that wages are at least 50% of the total remuneration, this figure is now higher, leading to increased gratuity amounts. This adjustment represents a tangible benefit for employees, aligning their gratuity payouts more closely with their overall compensation structure.
As the implementation date approaches, it is crucial for both employers and employees to understand these nuances. The New Labour Codes 2025 not only redefine wage structures but also recalibrate the landscape of employee benefits, making informed financial planning more important than ever.
