PF and Gratuity Set To Rise Under Labour Codes, Here’s What It Means for Salaries

With the new financial year beginning April 1, proposed changes under India’s labour reforms are drawing attention for their impact on employee salaries, particularly provident fund (PF) contributions and gratuity payouts. The reforms, introduced through four labour laws, are expected to significantly alter how salaries are structured once fully implemented with final rules.

At the core of the changes is a provision under the Code on Wages, 2019 mandating that at least 50% of an employee’s total cost to company (CTC) be classified as wages, including basic pay and dearness allowance. This shift is expected to increase retirement-linked benefits while slightly reducing monthly take-home pay. New Labour Codes in India: Key Changes To Leave, Salary and Working Hours Explained.

50% Wage Rule to Reshape Salary Structure

Under the proposed framework, employers will need to ensure that basic salary and dearness allowance together make up at least half of the total CTC.

Currently, many companies structure salaries with a lower basic component and higher allowances to reduce statutory payouts. The new rule would limit this flexibility by capping allowances at 50%, with any excess treated as wages. 8th Pay Commission Fitment Factor: Will Minimum Basic Pay Jump From INR 18,000 to INR 46,000? Check Details.

Higher PF Contributions, Stronger Retirement Savings

One of the most immediate impacts will be on provident fund contributions. Under existing rules, employees contribute 12% of their basic salary to PF, with employers matching the amount.

As basic salaries rise under the new structure, PF contributions will also increase. For example, if the basic salary rises from INR 30,000 to INR 50,000, monthly PF contributions would increase from INR 3,600 to INR 6,000, with a matching employer contribution.

While this would reduce in-hand salary, it would significantly boost long-term retirement savings through higher and sustained contributions.

Gratuity Payouts Likely to Increase

Gratuity benefits are also expected to rise under the new wage structure. Since gratuity is calculated based on the last drawn basic salary, a higher basic component would lead to a larger payout at the time of exit.

The reforms, linked to the Code on Social Security, 2020, also propose more flexible eligibility conditions, allowing employees to qualify for gratuity benefits earlier in certain cases. Over a longer tenure, this could substantially enhance the final retirement corpus for employees.

Why Take-Home Salary May Decline

Despite no change in total CTC, employees may see a dip in monthly take-home pay. This is primarily due to higher PF deductions and a shift from flexible allowances to fixed wage components.

For instance, under a INR 1 lakh monthly salary, a higher basic component would increase statutory deductions, reducing immediate disposable income while strengthening long-term financial security.

Four Labour Codes Behind the Changes

The salary restructuring is part of broader reforms under four consolidated labour laws:

• Code on Wages, 2019
• Industrial Relations Code, 2020
• Code on Social Security, 2020
• Occupational Safety, Health and Working Conditions Code, 2020

These laws aim to simplify compliance, replace 29 existing labour laws, and enhance worker protection across industries.

The proposed changes reflect a shift towards structured savings and improved social security. While employees may experience a short-term reduction in take-home salary, the long-term benefits include higher retirement savings, increased gratuity payouts and more consistent salary structures. The final implementation will depend on the notification of rules by states and the central government.

(The above story first appeared on LatestLY on Apr 04, 2026 06:34 PM IST. For more news and updates on politics, world, sports, entertainment and lifestyle, log on to our website latestly.com).