India's new labour codes, effective November 2025, aim to create a uniform structure for wages and bonus payments across various sectors, ensuring equal remuneration for equal work. These codes consolidate 29 existing labor laws into four comprehensive codes: the Code on Wages, the Industrial Relations Code, the Code on Social Security, and the Occupational Safety, Health and Working Conditions Code. The changes are designed to simplify compliance for employers, strengthen workers' rights, and promote a more equitable and transparent labor ecosystem.
Key Changes in Wage and Bonus Rules
Definition of Wages: The Code on Wages introduces a standardized definition of "wages" to calculate statutory entitlements like minimum wages, overtime, gratuity, leave encashment, Employees' State Insurance (ESI), and bonus. Wages include basic pay, dearness allowance, and retaining allowance, which form the core compensation. However, several components are excluded from the definition of wages, including:
- Bonus (if not part of the employment terms)
- Employer contributions to Provident Fund (PF) or pension schemes
- House Rent Allowance (HRA)
- Conveyance allowance
- Overtime payments
- Commissions
- Gratuity
- Retrenchment compensation
- Value of amenities like housing, water, and medical attendance
50% Cap on Allowances: A significant reform is the introduction of a 50% cap on excluded allowances. If the total of allowances such as HRA, overtime, and commissions exceeds 50% of an employee's total remuneration, the excess amount will be included in the wage calculation. This measure is expected to curb the practice of companies keeping basic pay low to reduce their statutory liabilities related to PF contributions. Employers may need to revamp salary structures to align with this new definition.
Impact on Salary Structure: The new wage definition implies that the total component of wages (basic salary + dearness allowance + retaining allowance) must be at least 50% of the total pay. This change will result in social security contributions like PF, gratuity, maternity benefits, and bonus being calculated on a larger portion of the salary. While this may increase social security benefits, it could also reduce the take-home salary for employees.
Floor Wage: The Code on Wages introduces the concept of a "floor wage," which will be fixed by the central government. This floor wage will serve as a baseline for minimum wages across the country, ensuring that no state government fixes minimum wages below this level. The minimum wages will be set for time work and piece work, and can be calculated on an hourly, daily, or monthly basis, varying across different geographical areas.
Overtime Wages: Employers are now required to pay employees at least twice the normal wage rate for any work exceeding normal working hours.
Equal Remuneration: The new code strengthens gender pay parity by including allowances such as HRA, conveyance allowance, overtime allowance, and remuneration from legal settlements when determining equal wages. This ensures that men, women, and transgender employees are paid equally for work of a similar nature.
Implications for Employers and Employees
For employers, the new labor codes necessitate a review and restructuring of existing salary structures to ensure compliance with the revised wage definition and the 50% cap on allowances. Employers also need to be prepared for increased social security contributions and potential adjustments in take-home salaries for employees.
Employees can expect changes in their salary structures, with a higher proportion of their total compensation potentially going towards basic pay and social security contributions. While this might reduce their immediate take-home pay, it is likely to enhance their long-term social security benefits.
The implementation of these codes marks a move towards a more structured and compliance-driven labor ecosystem, requiring proactive planning and monitoring from organizations to ensure compliance and avoid operational disruptions.
