Retirement Corpus To Get Bigger As New Labour Rules Push Up Worker Contributions
New labour codes, effective November 21, 2025, are set to reshape the retirement landscape for Indian workers. The implementation of these codes, unifying 29 central labor laws into four comprehensive codes, aims to simplify compliance, enhance worker protection, and modernize workforce regulations. A key change mandates that an employee's basic salary must constitute at least 50% of their total cost-to-company (CTC). This shift is poised to significantly increase contributions to retirement savings, potentially leading to a larger retirement corpus for many, though it may also result in reduced take-home pay.
The core of the change lies in the revised definition of "wages" under the Code on Wages and Social Security. This standardization ensures uniformity in computing social security benefits, including provident fund (PF) and gratuity. Previously, many companies intentionally kept basic salaries low while offering various allowances to minimize their obligations towards retirement benefits. The new regulation seeks to curb this practice by capping allowances at 50% of total compensation. If allowances exceed this limit, the excess amount will be added back to wages, increasing the base for PF and gratuity calculations.
For employees, this means a greater portion of their salary will be directed towards mandatory retirement contributions. Since PF contributions are typically calculated as a percentage of basic salary (12% is common), a higher basic pay automatically translates to increased contributions. Similarly, gratuity payments, often determined by the final basic pay and tenure, will also rise. While this ensures enhanced retirement benefits and stronger social security for the future, it also implies a potential dip in take-home pay, as the increased contributions will come from the existing CTC.
However, the impact on take-home pay may vary. Some employers may choose to restructure compensation packages or increase the overall CTC to offset the increased contributions. This would allow employees to maintain their current take-home pay while simultaneously benefiting from a larger retirement corpus. According to Suchita Dutta, executive director of the Indian Staffing Federation, companies may restructure allowances downward to offset costs.
The new labor codes also bring other significant changes. Fixed-term employees now become eligible for gratuity after just one year of continuous service, instead of the previous requirement of five years. The codes also extend social security protections to gig, platform, and unorganized workers. Aggregators are now required to contribute 1-2% of their annual turnover towards the social security of these workers. Furthermore, the codes standardize working hours with a 48-hour weekly cap and clarify overtime and leave provisions.
For employers, the new rules necessitate a restructuring of salary frameworks to ensure compliance. They will face higher contributions to PF and gratuity. However, the codes also offer increased flexibility in manpower planning by raising the threshold for layoffs and closures to 300 workers. The introduction of an inspector-cum-facilitator system, driven by technology and randomized inspections, aims to reduce harassment and improve transparency.
In conclusion, the implementation of the new labor codes marks a significant step towards strengthening worker protection and social security in India. While the increased retirement contributions may lead to a short-term reduction in take-home pay for some, the long-term benefits of a larger retirement corpus are undeniable. The success of these reforms will depend on how effectively companies adapt to the new regulations and how well employees understand and utilize the enhanced retirement benefits.
