🚨 India's New Labour Codes are Here: The Mandatory CTC Overhaul Every Business Must Complete by 2026

The long-awaited simplification of India's labour laws has arrived. As of November 21, 2025, the four central Labour Codes are in force. While these codes span Industrial Relations, Social Security, and OSHWC, the most immediate and profound impact is being felt in payroll under the Code on Wages, 2019 (CoW).

1. The Single Rule That Rewrites Every Salary Slip

The core of the compliance challenge lies in the uniform, mandatory definition of "Wages" under the CoW. This single definition forces a non-negotiable threshold that invalidates many existing CTC structures.

The 50% Wage Floor Rule

The Code on Wages mandates that the sum of Basic Pay, Dearness Allowance (DA), and Retaining Allowance (the "Inclusion" components) must be at least 50% of the employee’s Total Remuneration (Gross Salary).

Before: Many companies kept Basic Pay low (~25–40% of CTC) and maximized allowances (Special Allowance, HRA) to minimize statutory payouts (PF, Gratuity). Now: If the total of Allowances (Exclusions) exceeds 50% of the Total Remuneration, the excess amount must be added back into the "Wages" for statutory calculation purposes. This immediately and directly impacts your statutory liability, even if you do nothing else.

2. The Inevitable Trade-Off: Higher Savings, Lower Take-Home

This restructuring creates a mandatory financial trade-off for employees and a cost restructuring challenge for employers. The overall Cost-to-Company (CTC) does not change, but the internal allocation shifts dramatically.

A. The Employee Impact: Less Now, More Later

• Basic Pay / Wages: Increases (mandatorily for non-compliant structures) — to meet the 50% floor.
• Employee PF Contribution: Increases — PF is calculated at 12% of the new, higher Basic/Wages base.
• Net Take-Home Salary: Decreases — higher PF contribution reduces spendable allowances.
• Gratuity Payout: Increases — gratuity is calculated on the higher, uniform "Wages" base.

B. The Employer Impact: Higher Liability Accrual

• Employer PF Contribution: Rises because it is also calculated on the higher Basic/Wages component.
• Gratuity Liability: Annual accrual increases — a material accounting item that should be reflected on the balance sheet.

3. Beyond CTC: The Game-Changers in Social Security

The CoW is just one part of the four-Code framework. Two changes under the Code on Social Security, 2020 (SS Code) require immediate attention, particularly regarding hiring models:

A. Gratuity for Fixed-Term Employees

Fixed-Term Employees (FTEs) are now eligible for pro-rata gratuity after completing one year of continuous service. The five-year rule remains for permanent employees. This change makes the FTE model more costly but more aligned with worker protections.

B. Formalization and Social Security for Gig Workers

The SS Code formally recognizes Gig Workers and Platform Workers. The government can design social security schemes and require aggregators to contribute (estimated 1–2% of annual turnover, with caps). This is a major shift for tech and logistics sectors.

4. The Path to Compliance: Three Immediate Steps

Given the implementation date of November 21, 2025 and the pending State Rules, companies must adopt an Agentic AI approach to simulation and audit:

1. Run the Simulation: Phase I payroll simulation using the 50% wage floor to identify non-compliant employees and quantify the Mandatory Hike.
2. Design the Restructuring: Use simulation output to redesign salary structure by offsetting Basic Pay increases with discretionary allowances to keep CTC constant.
3. Prepare Communication: A transparent employee communication strategy that highlights long-term benefits (higher retirement savings) to reduce pushback on lower take-home pay.

— The new Codes are the New Normal for Indian payroll. Proactive simulation and restructuring are the only ways to ensure compliance and avoid future penalties.