The four Labour Codes took effect on 21 November 2025, and the Code on Wages changed how "wages" is defined. The headline is the 50% rule, which is widely misread: it limits how much pay can be kept outside wages. It does not say basic pay must be 50% of your salary.
What changed and when
The Government of India brought the Code on Wages, the Industrial Relations Code, the Code on Social Security and the Occupational Safety, Health and Working Conditions Code into force from 21 November 2025, replacing 29 central labour laws. The Ministry's release said existing laws and rules stay in force during the transition while rules under the Codes are drafted (Council for Leather Exports circular reproducing the release).
Rule-making has been uneven. As of 8 May 2026, central rules had been pre-published and several states had notified rules under all four Codes, while others were still pending (iPleaders). Check your own state's position before you act.
How the wage definition works
Under Section 2(y) of the Code on Wages, "wages" includes basic pay, dearness allowance and retaining allowance. The Code then lists items that are excluded, among them bonus that is not part of contractual pay, house rent allowance, conveyance, employer contributions to provident fund and pension, overtime and commission. If these excluded items together exceed 50% of total remuneration, the excess is treated as wages (S.S. Rana). Gratuity and retrenchment compensation sit outside that cap.
Worked example from the same commentary, for a monthly remuneration of ₹1,00,000:
| Item | Amount (₹) |
|---|---|
| Basic pay and DA | 35,000 |
| Excluded allowances and perquisites (65%) | 65,000 |
| Exclusions allowed under the 50% cap | 50,000 |
| Excess added back to wages | 15,000 |
| Wages for Code purposes | 50,000 |
The label "allowance" does not protect the ₹15,000 excess.
Why it reaches PF, gratuity and more
The Code on Social Security uses this wage definition for provident fund, so a larger wage base can raise PF contributions, and revised wages also feed gratuity. The Ministry of Labour's FAQ of 16 March 2026 applies the revised-wage gratuity calculation from the implementation date, with no grace period (People Matters). Separately, the PF wage ceiling itself rose from ₹15,000 to ₹25,000 on 17 September 2026, which widens the PF base for anyone earning up to the new ceiling (see our wage ceiling post).
What about variable pay?
The Code is silent on it. Ministry FAQs of 30 December 2025 and 16 March 2026 say performance-based incentives, ESOPs and genuinely variable components are not part of wages. These FAQs are guidance, not an amendment to the statute, and pay that is fixed in substance does not become variable because it is labelled so.
Five steps to get payroll ready
- Split each employee's pay into included and excluded components under Section 2(y).
- Calculate the excluded share of total remuneration, employee by employee.
- Model the impact on PF, gratuity, bonus and take-home pay.
- Update salary structures, appointment letters and payroll configuration.
- Keep a written note of how each component was classified and why.
General information, not legal advice. Statute wording is taken from the commentary cited; verify against the Gazette text before relying on it.