Big changes are coming to your payslip—and they’re not just about numbers. On December 31, 2025, the Ministry of Labour and Employment pre-published the long-anticipated draft rules for the New Labour Codes, along with a comprehensive set of FAQs that finally clarify how salary, gratuity, and allowances will be calculated under the unified framework .
After years of delays and speculation, these draft rules offer the clearest picture yet of how India’s biggest labour law overhaul—consolidating 29 existing laws into four codes—will impact over 500 million workers and millions of employers nationwide.
Whether you’re an employee wondering why your in-hand salary might change, or a business owner trying to stay compliant, this is your essential guide to what’s new, what’s mandatory, and what’s still up for debate.
Table of Contents
- What Are the New Labour Codes?
- Key Changes to Salary and Wage Calculation
- How Gratuity Will Be Calculated Under the New Rules
- Allowances: What Counts as Part of Wages?
- Implications for Employees and Employers
- What Happens Next: Timeline and Implementation
- Summary
- Sources
What Are the New Labour Codes?
The New Labour Codes are a historic consolidation of India’s fragmented labour legislation into four unified codes:
- Code on Wages, 2019
- Industrial Relations Code, 2020
- Occupational Safety, Health and Working Conditions Code, 2020
- Code on Social Security, 2020
While passed by Parliament years ago, their implementation was delayed due to complexities around definition alignment, state-level adoption, and administrative readiness. The December 31, 2025 draft rules aim to resolve these ambiguities—especially around the critical definition of “wages.”
Key Changes to Salary and Wage Calculation
The biggest shift in the New Labour Codes revolves around how “wages” are defined. Under the new framework, a large portion of your current salary components will now be classified as “wages”—which directly impacts statutory contributions and benefits.
According to the FAQs released by the Ministry :
- At least 50% of your total remuneration must be classified as “basic wages.”
- Allowances like dearness allowance (DA), retaining allowance, and other fixed components will be included in this 50%.
- Excluded items (capped at 50%) include bonuses, overtime, conveyance, house rent allowance (HRA), and employer PF contributions.
Practical Example: If your total CTC is ₹1,00,000, at least ₹50,000 must be categorized as basic wages. Previously, companies could structure basic pay as low as 30–40%, minimizing PF and gratuity liabilities. That loophole is now closing.
How Gratuity Will Be Calculated Under the New Rules
Gratuity eligibility is expanding—and so is the payout base.
Under the Code on Social Security:
- Gratuity will now be available to all employees after completing 5 years of service—including those in establishments with fewer than 10 workers (previously exempt).
- Since gratuity is calculated on “last drawn wages,” and “wages” now include a higher basic component, gratuity payouts are expected to increase significantly.
- The formula remains: (15 × last drawn wages × years of service) ÷ 26.
This is a major win for workers in the unorganized and small-enterprise sectors.
Allowances: What Counts as Part of Wages?
Not all allowances are treated equally. The draft rules specify which allowances are included in “wages” for the purpose of calculating PF, ESIC, bonus, and gratuity:
| Allowance Type | Included in Wages? |
|---|---|
| Dearness Allowance (DA) | Yes |
| Retaining Allowance | Yes |
| House Rent Allowance (HRA) | No |
| Conveyance Allowance | No |
| Overtime Pay | No |
| Commission | No |
| Bonus | No |
This clarity ends years of legal disputes over what constitutes “wages” under various legacy laws.
Implications for Employees and Employers
For Employees:
- Higher take-home may decrease slightly due to increased PF/ESIC deductions, but long-term benefits (gratuity, pension) will improve.
- Greater job security and expanded social security coverage.
For Employers:
- Increased statutory costs (PF, gratuity, bonus) due to higher wage base.
- Need to revise payroll structures, payroll software, and employment contracts by the implementation date.
- Small businesses may face compliance challenges but gain access to streamlined digital filing via the Shram Suvidha Portal .
For more on business compliance, see our guide on [INTERNAL_LINK:payroll-compliance-in-india].
What Happens Next: Timeline and Implementation
The draft rules are now open for public consultation. Final rules are expected by early February 2026, with a likely nationwide rollout by April 1, 2026—the start of the new financial year.
States must also adopt these codes through their own notifications, but the central government’s move is expected to accelerate the process. The International Labour Organization (ILO) has praised India’s effort to modernize its labour framework, calling it “a step toward formalizing the informal economy” .
Summary
The New Labour Codes draft rules of December 2025 mark a turning point in India’s employment landscape. By standardizing the definition of wages and expanding social security, they aim to create a fairer, more transparent system for both workers and businesses. While short-term payroll adjustments are inevitable, the long-term vision is clear: decent work for all. Employers should start reviewing their compensation structures now, and employees should understand how their benefits will grow. Stay updated with our ongoing coverage at [INTERNAL_LINK:indian-labour-law-updates].
Sources
- Ministry of Labour and Employment, Government of India. “Draft Rules and FAQs on Labour Codes.” Published December 31, 2025. https://labour.gov.in/draft-labour-codes-2025
- Shram Suvidha Portal. “Unified Labour Law Compliance.” https://shramsuvidha.gov.in
- International Labour Organization (ILO). “India’s Labour Code Reform: A Path to Formalization.” https://www.ilo.org/newdelhi