Mint Explainer | How do new labour codes impact your gratuity and PF?
The new labour codes have overhauled how wages, gratuity, provident fund, pension and other social security benefits are calculated. Mint explains who benefits and if your take-home salary is affected.
The Centre has announced a new framework that consolidates the country’s employment statutes into four codes. The new labour codes have overhauled the calculation of wages, gratuity, provident fund (PF), pension, and other social security benefits. These changes affect both employees and employers. Mint explains who benefits and if your take-home salary is affected.
What is the new definition of wages?
The definition of ‘wages’ has been standardized across the four new codes. The new definition includes basic pay, dearness allowance (DA) and all other retaining allowances that are part of the cost-to-company (CTC) and are not specifically exempted.
As per The Code On Wages, 2019, the main exclusions include house rent allowance (HRA), conveyance allowance, the employer’s PF contribution and commission. But the important thing is that these exclusions combined cannot exceed 50% of total remuneration.
This would mean at least half of your CTC is likely to be treated as ‘wages’ for calculating key benefits like gratuity, provident fund, Employees’ State Insurance Corporation (ESIC), maternity benefits and other social security.
Will your gratuity, PF increase?
Gratuity will increase considerably. Until now, gratuity was calculated based on basic pay plus DA for every completed year of service. Since most companies kept basic plus DA pay low, while paying the rest with allowances, the gratuity base remained small. Now, the new base for calculation will be reset to at least 50% of your CTC.
PF contributions, however, will not yet increase under the new codes. These are governed by the existing EPF, Employees’ Pension Scheme (EPS) and Employees’ Deposit-Linked Insurance (EDLI) schemes, which remain in force. As per the EPF scheme, the mandatory PF contribution is calculated on up to ₹15,000 of wages.
“The labour code itself specifies that the current schemes will continue in the foreseeable future, so the ₹15,000 ceiling will apply," said Puneet Gupta, partner, People Advisory Services–Tax, EY India. “PF calculation on the new ‘wages’ definition will matter only for employees whose basic plus DA is below ₹15,000. Such employees may see a change in PF contribution, but only up to the ₹15,000 ceiling."
The government notification issued on Friday does not yet repeal the existing PF Act in its entirety, said Parizad Sirwalla, partner and head, global mobility services, tax, KPMG in India. “In this case, the existing definition of wages and all other provisions may continue to apply till such time that the earlier Act is repealed," she said.
Who will now become eligible for gratuity and when?
The minimum service requirement for gratuity has been reduced from five years to one year for fixed-term employees. Any employee whose employment contract has an end date is a fixed-term employee, even if the contract is routinely renewed.
The rule does not apply to permanent, on-roll employees, who must still complete five years to be eligible (unless the exit is due to death or disability).
However, Sirwalla cautions that while clarity is awaited, in the case of a recurring renewal of a fixed-term contract, with no gap or termination in service, the same may not strictly be construed as fixed-term employment.
Are these changes effective immediately?
The erstwhile Act governing gratuity was repealed effective 21 November 2025, so gratuity calculation based on the new, broader definition of wages is already applicable. This will apply retrospectively, meaning anyone who leaves a job or retires after 21 November and is eligible for gratuity can expect a higher payout as per the new wage definition.
“It will apply retrospectively, unless the government introduces a new rule that takes away the retrospective impact," said Gupta of EY.
Changes to gratuity, PF and ESI (Employees’ State Insurance) calculations can be implemented by employers immediately. For PF specifically, the existing ₹15,000 wage cap remains in effect until revised, limiting any changes in employer or employee contributions.
Will your take-home salary reduce?
Employees’ take-home pay is unlikely to be affected immediately. Gratuity is paid on exit and is not deducted from the monthly salary, so it does not reduce regular earnings. PF contributions remain capped at ₹15,000, meaning most employees will see no change. However, those earning below ₹15,000 may experience a small increase in contribution, and thereby a drop in take-home.
Will companies revise salary structures to accommodate higher gratuity without jacking up the CTC amount? They may adjust compensation packages for new hires to align with the broader wages definition, but are unlikely to do so for existing employees. Sirwalla of KPMG noted that employers cannot restructure pay solely to reduce their liability under the codes.
Employees with low or no HRA or conveyance allowance may see adjustments to include these components, aligning their salary with the new definition of wages and optimising gratuity. Without such exclusions, a larger portion of their pay would count as wages, increasing the gratuity cost for the employer.
Overall, take-home salaries remain stable.
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