Mumbai/Delhi, The Indian government’s long-awaited labour reforms, consolidated into four new labour codes, have finally moved closer to implementation. On 21 November 2025, the Centre issued the formal notification bringing the codes into force, compelling companies to overhaul existing salary structures, often within months.
At the heart of the controversy is a single provision: under the Code on Wages 2019 and the yet-to-be-notified rules under the Social Security Code 2020, “basic wages” must constitute at least 50% of an employee’s total cost-to-company (CTC). Allowances – house rent, conveyance, medical, leave travel, and special allowances – can no longer exceed the other half.
For millions of private-sector workers, the immediate consequence is likely to be a sharp reduction in monthly take-home salary, even as long-term retirement benefits rise.
Why the change matters
Historically, Indian employers have kept basic salary low (often 20-40% of CTC) and loaded the balance into tax-efficient or non-taxable allowances. Because statutory contributions to the Employees’ Provident Fund (EPF) and gratuity are calculated only on basic salary plus dearness allowance, a low basic component minimised mandatory deductions and maximised in-hand pay.
The new 50% floor reverses that logic. Higher basic pay automatically triggers higher EPF contributions (12% each from employee and employer) and a larger gratuity outflow for the employer (4.81% of basic + DA). To keep overall CTC unchanged, companies are widely expected to cut allowances proportionally – leaving employees with larger deductions and lower net salary.
A worked example
Consider an employee currently on a CTC of ₹50,000 per month.
Current typical structure
– Basic salary: ₹15,000 (30% of CTC)
– HRA, conveyance, special allowance, etc.: ₹35,000
– Employee EPF contribution (12% of basic): ₹1,800
– Take-home (assuming standard deductions): ≈ ₹43,000–44,000
Post-reform structure (50% basic rule enforced, CTC unchanged)
– Basic salary: ₹25,000 (50% of CTC)
– Allowances: ₹25,000 (capped at remaining 50%)
– Employee EPF contribution (12% of ₹25,000): ₹3,000
– Additional monthly deduction: ₹1,200
– New take-home: ≈ ₹41,800–42,800 (a drop of 3–5% or more, depending on other allowances)
For higher earners – particularly in IT, consulting, and financial services where basic pay is frequently below 30% of CTC – the monthly cash-flow impact can exceed ₹5,000–₹15,000.
The trade-off
The government argues that the reform strengthens social security. A larger EPF corpus and higher gratuity (payable after five years of service) will provide better retirement income, especially for workers who change jobs frequently and previously left with tiny provident fund balances.
Employers, meanwhile, face rising fixed costs. Many are already modelling scenarios where they absorb part of the increased EPF burden or redesign compensation packages with tax-efficient reimbursements and performance-linked bonuses that fall outside the 50% net.
Implementation timeline
While the four codes received presidential assent between 2019 and 2020, the Centre and most states had delayed notification of rules. With the 21 November 2025 gazette, companies now expect enforcement deadlines ranging from 1 April 2026 to 1 July 2026, depending on final state-level rules.
HR consultants report a flurry of salary restructuring exercises under way. “The era of inflated allowances is over,” said one head of compensation at a large Indian IT services firm. “Employees will see fatter retirement accounts in 20 years, but thinner wallets today.”
For India’s salaried middle class, the new codes represent a rare instance where greater long-term security comes at the price of immediate financial pain.
