Income Tax: How New Labour Laws May Change Your Take-Home Salary

New Delhi, January 25: With Budget 2026 around the corner and sweeping Labour Laws set to reshape India’s employment framework, salaried employees are closely watching how the new labour codes will affect their monthly take home pay. The four labour codes, notified for implementation from November 21, 2025, are among the biggest workplace reforms in decades and directly impact salary structures, provident fund contributions and long term savings.

The reforms consolidate 29 existing labour laws into four simplified codes. These include the Code on Wages, Industrial Relations Code, Social Security Code and the Occupational Safety, Health and Working Conditions Code. While the government says the changes will improve compliance and strengthen social security, many employees may see a shift in how their salary is structured.

The 50 Percent Wage Rule Explained

The most talked about change under the new Labour Laws is the revised definition of wages. As per the Code on Wages, basic pay plus dearness allowance must make up at least 50 percent of an employee’s total cost to company. Earlier, many employers kept basic pay at 30 to 40 percent and paid the rest through allowances such as HRA and special allowance to reduce provident fund and gratuity liability. Union Budget 2026: What Is Economic Survey and How It Sets the Fiscal Direction.

If allowances exceed 50 percent of total remuneration, the excess will now be added back to wages. This effectively raises the basic salary component for many employees.

Impact on Take Home Salary

A higher basic salary means higher mandatory provident fund contributions. Employees contribute 12 percent of basic pay to PF, and this amount is deducted from monthly salary. As a result, take home pay may reduce for employees whose basic salary increases under the new rules. Employers may also rebalance allowances to keep the overall CTC unchanged. Budget 2026: Joint Tax Filing Proposal May Double Income Tax Exemption for Married Couples to INR 8 Lakh.

There is some relief for higher earners. PF contributions beyond the statutory wage ceiling of 15000 rupees remain voluntary. If both employer and employee cap PF at this limit, the deduction may not rise despite a higher basic pay.

Long Term Benefits for Employees

While monthly cash flow may be impacted, the new Labour Laws aim to strengthen retirement security. Higher PF contributions can build a larger retirement corpus over time. Gratuity payouts will also increase as they are calculated on the last drawn basic salary.

Another key change is for fixed term and contract employees, who will now be eligible for gratuity after one year of service on a pro rata basis.

Current Status and What Employees Should Do

The labour codes are currently in a transition phase. Draft rules were released on December 30, 2025, and are open for public consultation until mid February 2026. Full implementation will follow once states align their rules.

As Budget 2026 approaches, employees should review their salary structure and speak with HR teams to understand how the new Labour Laws may affect their take home pay, tax planning and savings strategy.

(The above story first appeared on LatestLY on Jan 26, 2026 03:50 PM IST. For more news and updates on politics, world, sports, entertainment and lifestyle, log on to our website latestly.com).