India's new Labour Codes, implemented on November 21, 2025, have brought about significant changes in the calculation of wages, provident fund (PF), gratuity, and income tax, impacting both employees and employers. These codes consolidate 29 existing central labor laws into four comprehensive codes: the Code on Wages (2019), the Industrial Relations Code (2020), the Code on Social Security (2020), and the Occupational Safety, Health and Working Conditions Code (2020). The primary goal is to simplify compliance, expand worker protections, and align with global standards.

Impact on Provident Fund (PF)

One of the most significant changes is the new rule stipulating that an employee's basic salary must constitute at least 50% of their total cost-to-company (CTC). Earlier, companies often kept basic pay low and split salaries into numerous allowances, which reduced PF contributions. With the new codes, if the basic pay, dearness allowance, and retaining allowance together make up less than 50% of the total salary, the remaining components will be adjusted to meet the 50% mark. Since PF contributions are calculated as a percentage of basic pay (12% currently), a higher basic salary will lead to increased PF deductions from the employee's salary, as well as a higher contribution from the employer. While this may reduce the take-home salary, it significantly boosts long-term savings and retirement security.

Impact on Gratuity

Gratuity, a lump sum payment to an employee upon leaving a job after a certain period of service, is also set to be impacted by the new Labour Codes. Similar to PF, gratuity is calculated based on the basic salary. The requirement for a minimum of 5 years of continuous service for gratuity eligibility has been reduced to one year for fixed-term employees, providing them with benefits on par with permanent workers. With the new definition of wages including a greater portion of the salary, gratuity payouts are expected to rise significantly.

Impact on Income Tax

While the Labour Codes do not directly alter income tax laws, the changes in salary structure and increased PF contributions can have an indirect impact on an employee's taxable income. With a higher basic salary, the taxable component of the salary increases, which could lead to a higher income tax liability, depending on the individual's tax bracket and other deductions. However, the increased PF contributions can be claimed as deductions under Section 80C of the Income Tax Act, potentially offsetting the higher tax liability.

Impact on Take-Home Salary

The most immediate impact of the new Labour Codes is a potential reduction in take-home salary for many employees. As the basic salary component increases to meet the 50% requirement, the allowances, which are typically fully taxable, decrease. This shift results in higher deductions towards PF and potentially higher income tax, leaving employees with less disposable income in hand. However, it is important to note that this reduction in take-home pay is balanced by increased retirement savings and long-term financial security.

Other Key Changes

The new Labour Codes bring several other significant changes, including:

• Universal Minimum Wages: The codes introduce universal minimum wages for all employees across organized and unorganized sectors, ensuring that no worker receives wages below the minimum living standard.
• Expanded Social Security Coverage: Social security coverage has been extended to include gig workers, platform workers, and unorganized sector employees, providing them with access to benefits like PF, ESIC, and insurance.
• Formalization of Employment: The codes mandate appointment letters for all workers, ensuring transparency, job security, and fixed employment through written proof.
• Gender Neutrality: The codes prohibit gender discrimination in pay and job opportunities, ensuring equal pay for equal work. Women can work night shifts and in all types of work, subject to consent and safety measures.
• Simplified Compliance: The codes aim to simplify compliance for employers by consolidating multiple labor laws into a single framework and introducing a single registration, license, and electronic return.

In conclusion, the implementation of the Labour Codes 2025 is set to reshape India's labor landscape significantly. While there may be a short-term impact on take-home salaries, the long-term benefits of enhanced social security, retirement savings, and worker protections are expected to outweigh the drawbacks.