Last reviewed: 25 September 2026. On 21 November 2025, India brought all four labour codes into force, folding 29 central laws into the Code on Wages, the Industrial Relations Code, the Code on Social Security and the OSH Code. Many employers are waiting for their state's rules before acting — a costly misreading. The provisions that change payroll maths, notably the 50% wages definition, flow from the codes themselves and are already operative; state rules mainly set procedure. As on 25 September 2026, the Code on Wages (Central) Rules, 2026 have been notified (G.S.R. 343(E) dated 8 May 2026), while Maharashtra's rules under all four codes were published in draft in April and May 2026, with comments invited until 12 June 2026, and are still shown as drafts on the state labour department's website. Arrears discovered later are computed from now, not from when an inspector arrives.
The 50% rule — a worked example
Employee CTC Rs 6,00,000. Old structure: basic Rs 1,80,000 (30%), allowances Rs 4,20,000 (70%).
| Component | Old structure | Code-compliant view |
|---|---|---|
| Basic (wage base) | Rs 1,80,000 | Rs 3,00,000 — excluded portion capped at 50%, excess added back |
| Allowances excluded | Rs 4,20,000 | Rs 3,00,000 maximum |
| Gratuity accrual (4.81% of wage base) | ~Rs 8,660/yr | ~Rs 14,430/yr |
| Leave encashment base | Lower | Higher — same add-back logic |
| PF (subject to structure/ceiling choices) | On old basic | Recheck against the wider definition |
Multiply the gratuity delta across headcount and years of service to see the balance-sheet provision impact. Actuarial or systematic provisioning becomes prudent even for smaller companies.
Code-wise: what employers must do
| Code | Key employer obligations |
|---|---|
| Code on Wages | Restructure CTCs to the 50% definition; timely wage payment norms; floor wage to follow on notification |
| Industrial Relations Code | Standing-order thresholds; fixed-term employment recognised with benefit parity; revised retrenchment thresholds |
| Code on Social Security | PF/ESI on redefined wages; gratuity for fixed-term staff; gig-worker schemes for aggregators |
| OSH Code | Appointment letters; 8/48 hour frame with OT at 2x; annual health check-ups (per notified class); women may work night shifts with consent and safeguards; single registration for 10+ workers |
90-day action plan
- Weeks 1-2 — audit: list every employee's CTC split; flag structures where excluded allowances exceed 50%; identify fixed-term contracts and their gratuity exposure.
- Weeks 3-6 — restructure: model the cost of compliant structures; issue revised CTC letters; update employment contracts and appointment-letter templates; recalibrate payroll software formulas for PF, gratuity and leave encashment.
- Weeks 7-12 — institutionalise: refresh attendance/OT policy to the 8/48 frame; align registers and records; brief payroll vendors; document the transition file (old vs new structures, board/management approvals) as your defence record.
Foreign-owned subsidiaries and Employer-of-Record set-ups
The codes apply to every establishment in India, whoever owns it. Indian subsidiaries of foreign groups often inherit a global salary template with a low basic and large allowances, and Employer-of-Record providers employ staff on behalf of foreign companies with no Indian entity. Both must restructure CTCs to the 50% definition, issue appointment letters and provide for gratuity, and the higher retiral cost should flow into group budgets and intra-group recharges. We handle this for foreign parents through our foreign subsidiary accounting, CFO and FEMA service.
Common employer mistakes
- Waiting for Maharashtra's final rules while arrears accrue under the operative code provisions.
- Restructuring CTC on paper but leaving payroll software formulas on the old basic.
- Ignoring gratuity accrual for one-year fixed-term hires.
- No appointment letters for old staff — the mandate covers existing employees, not just new joiners.
- Treating OT casually — double-wage OT with the hours frame is an inspection favourite.
Employers tracking payables discipline under the MSME 45-day rule — section 37(2)(g) of the Income-tax Act, 2025 (old 43B(h)) from tax year 2026-27 — should treat this the same way: a definitional change with direct P&L consequence, best handled with a documented transition.
Frequently asked questions
Are the labour codes actually in force now?
Yes. All four codes — on Wages, Industrial Relations, Social Security, and Occupational Safety, Health & Working Conditions — were brought into force from 21 November 2025, replacing 29 central labour laws. As on 25 September 2026, the Code on Wages (Central) Rules, 2026 have been notified (G.S.R. 343(E), 8 May 2026), while Maharashtra's rules under all four codes were published only in draft in April and May 2026, with comments invited until 12 June 2026. The substantive provisions of the codes themselves are operative.
What is the 50% wages rule in simple terms?
The codes define “wages” so that excluded components (HRA, conveyance, most allowances) cannot exceed 50% of total remuneration. Anything beyond 50% is added back to wages. Since PF, gratuity and leave encashment ride on this wider base, CTC structures with a small basic and large allowances no longer reduce those liabilities.
Does the 50% rule increase employer cost immediately?
It increases the base on which gratuity, leave encashment and (depending on structure) PF are computed. Whether total cost rises depends on your current salary structure — a company already paying basic at 50% of CTC sees little change; one at 30% basic sees a meaningful jump in retirals. Model it employee-wise before revising CTCs.
What changes for fixed-term employees?
Fixed-term employees get statutory parity in wages and benefits and become eligible for pro-rata gratuity without the five-year minimum service condition. Employers using one-year renewable contracts should build the gratuity accrual into costing from day one.
Do small MSMEs with a handful of staff need to act?
Yes, proportionately. Appointment letters are mandatory for every employee, wage-definition impact applies to any PF/gratuity-covered staff, and establishments with 10 or more workers move to a single unified registration. An establishment below PF/ESI thresholds still needs compliant appointment letters, wage records and working-hour norms.
Is gig and platform worker social security applicable to ordinary businesses?
The Code on Social Security creates schemes funded by aggregator contributions of 1-2% of annual turnover, capped at 5% of the amount paid or payable by the aggregator to gig and platform workers. It targets aggregators — e-commerce, ride-hailing, delivery platforms — not conventional employers; scheme operationalisation details continue to be notified.
Do foreign-owned Indian subsidiaries and Employer-of-Record set-ups need to restructure too?
Yes. The codes apply to every establishment in India, whoever owns it. A foreign-owned subsidiary, or an Employer-of-Record provider employing staff for a foreign company, must apply the 50% wages definition, issue appointment letters and provide for gratuity in the same way, and should reflect the higher retiral cost in group budgets and transfer pricing.
We run the CTC impact model, restructure salary templates, update PF/PT/ESIC treatment and keep the records inspection-ready.
PF, ESIC & PT ComplianceLabour Law ComplianceGet an impact assessmentThis article is general information as of 25 September 2026, not legal or professional advice. Central and state rule-making under the codes is ongoing — verify the current position for your state and establishment class before restructuring. Consult a professional for your specific facts.