India's Labour Code Overhaul: A New Era for Salary Structures and Benefits
India's transition to a comprehensive new labour law framework has initiated one of the most significant transformations in the nation's employment landscape. The implementation of the four labour codes, which came into force on November 21, 2025, marks a pivotal shift towards a unified regulatory system. At the core of this sweeping reform is the introduction of a single, standardized definition of "wages" that uniformly applies to all statutory benefits governed under these codes.
Understanding the Traditional Salary Framework
To grasp the magnitude of this change, it is essential to examine how salaries have traditionally been structured in India. Most employers have long relied on the Cost-to-Company (CTC) model, where an employee's total compensation is distributed across various components. This typically includes:
- Basic salary
- A diverse array of allowances
- Options for tax-efficient reimbursements covering expenses such as travel, telephone, internet, and fuel
This fragmented approach has often led to complexities in calculating statutory dues and benefits.
The New Wage Definition: Clarity and Compliance
The new labour codes fundamentally reshape this structure by providing a clear and consistent definition of what constitutes "wages" for the purpose of statutory benefits. According to the codes, wages encompass all salary components, including:
- Basic pay
- Dearness allowance
- Retaining allowance
However, the definition explicitly excludes specific components listed within the legislation. Crucially, if these excluded items exceed 50% of the total compensation, the excess amount must be added back to the wages for statutory calculations. This provision ensures that a substantial portion of an employee's earnings is considered for benefit computations.
Exclusions from the Wage Definition
The list of components excluded from the wage definition is comprehensive and includes:
- House rent allowance (HRA)
- Conveyance allowance
- The employer's share of provident fund contributions
- Housing accommodation provided by the employer
- Utilities such as light and water
- Medical attendance furnished by the employer
- Other specified amenities
Furthermore, the definition empowers the appropriate government to specify additional amenities or services to be excluded from wages through general or special orders, allowing for flexibility in implementation.
Impact on Social Security and Statutory Benefits
The revised wage definition carries profound implications for social security provisions. Key benefits such as gratuity and leave encashment are now to be calculated based on this new standardized definition. This change aims to create a more equitable and transparent system for determining employee entitlements.
Notably, employees and employers may continue contributing to the Provident Fund (PF) at the rate of 12% of basic salary, provided the basic salary exceeds the wage ceiling of Rs 15,000 under the PF Scheme. This applies even if the wages as defined under the labour codes are higher, ensuring continuity in existing contribution patterns.
Interaction with Income Tax Regimes
The new wage definition also interacts intricately with India's dual income tax regimes. Since wages exclude specific allowances, employees can continue to receive components like house rent allowance (HRA) and leave travel concession (LTC) without these forming part of the wage calculation. These allowances may still offer tax benefits under the old tax regime, subject to relevant eligibility rules.
Additionally, the revised draft central rules confirm that reimbursements for telephone and internet expenses, along with the value of meal vouchers, remain excluded from wages. These components may continue to provide tax exemptions under the old tax regime, while telephone and internet reimbursements remain eligible for exemption under the new tax regime as well. This offers employees considerable relief, as although the wage definition tightens compensation structures, several tax-efficient allowances remain accessible.
Safeguards in the Transition
An important protective measure in the transition to the new system is Section 124 of the Code on Social Security (COSS). This provision explicitly states that no employer shall, solely due to its liability to make contributions under the Code, reduce an employee's wages or the total quantum of benefits to which the employee is entitled under the terms of employment, whether express or implied. This safeguard ensures that employees' existing benefits are protected during the shift to the new framework.
Reorganizing India's Compensation System
Collectively, the new wage definition in the labour codes represents a significant reorganization of India's compensation system. Employers may now need to design salary packages in a manner that ensures at least half of an employee's gross salary falls within the defined wage parameters. While the CTC framework will persist, the internal composition of basic pay, allowances, and reimbursements will become more regulated and transparent, fostering greater clarity and fairness in employment practices.
The writer is a tax partner at EY India. The views expressed are personal.
