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Payroll: PF, ESI & PT

Salary structure under the labour codes: the 50% wage rule

2 min read Updated 03 Oct 2026 3 views
AI summary

How to design CTC under the four labour codes so PF, gratuity and bonus are worked out correctly.

8 sections

Key facts

  • The four labour codes are in force from 21 November 2025. They use one definition of wages for PF, ESI, gratuity, bonus and minimum wages.
  • Wages = basic pay + dearness allowance + retaining allowance.
  • Allowances such as HRA, conveyance, overtime, commission and bonus are excluded, but if the excluded items exceed 50% of total pay, the excess is added back to wages. In practice, basic + DA should be at least 50% of the pay package.
  • This raises PF and gratuity for employees whose basic was kept low.

Sample monthly structure (gross ₹50,000)

Component₹ / monthCounts as wages?
Basic + DA25,000Yes
HRA10,000No (within 50%)
Special allowance12,500No (within 50%)
Conveyance / other2,500No (within 50%)
Gross50,000Wages = 25,000 (50%)

PF on this: employer 12% and employee 12% on wages up to the ₹25,000 ceiling (from 17 September 2026) = ₹3,000 each. Of the employer's share, 8.33% (₹2,083) goes to EPS and the rest (₹917) to EPF.

ESI does not apply, as gross wages exceed ₹21,000 a month.

Professional tax: as per state slab (for example ₹200 a month in many states).

Other changes for employers

  • Gratuity for fixed-term employees after 1 year of service (5 years for others continues).
  • Wages must be paid by the 7th of the next month (monthly wage period), and full and final settlement within 2 working days of exit.
  • Appointment letters are compulsory for every employee.

Income tax angle

  • Under the new regime, most allowances are taxable; the standard deduction is ₹75,000. Employer's NPS contribution up to 14% of basic + DA is deductible.
  • Under the old regime, HRA exemption depends on basic, so a higher basic can also increase the HRA exemption.

Common questions

Does the 50% rule reduce take-home pay?

It can, slightly, because PF deduction goes up when basic rises. If PF is capped at the ₹25,000 ceiling, the impact is limited.

Do I have to restructure existing salaries?

Yes, for compliance. Where allowances exceed 50%, either restructure or calculate PF and gratuity on the added-back wages.

Sources

Law as of October 2026. Verify against the latest notifications before relying on it for filings.
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