Understanding the 2026 Labour Codes
India's four labour codes replaced 29 older central laws and came into force on 21 November 2025, with the Central Rules notified on 8 May 2026. The change that reaches payroll first is the wage definition: allowances are limited to 50 percent of total pay, so at least half of CTC counts as wages for PF, gratuity and leave encashment.
India's four labour codes replaced 29 older central labour laws. They are 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. They came into force on 21 November 2025. The Central Rules under them were notified on 8 May 2026, and state rules are still arriving, so check what applies where you operate.
For payroll teams, one change matters before all the others: the definition of wages.
The 50 percent wage rule
Under the codes, wages means basic pay, dearness allowance and retaining allowance. Components such as HRA, conveyance, statutory bonus, overtime and commission are excluded, but only up to 50 percent of total remuneration. Anything above that is added back to wages.
Take total monthly pay of ₹50,000 with a basic of ₹20,000. Excluded pay of ₹30,000 is 60 percent of the total, so ₹5,000 is added back and wages become ₹25,000. Employee PF on that base is ₹3,000 instead of ₹2,400.
The Ministry of Labour has said that gratuity on the revised wage definition applies from 21 November 2025, the date the codes came into force.
Why this changes more than PF
Wages are also the base for gratuity and some other benefits. A bigger wage base means a larger PF deduction, a larger employer contribution and a larger gratuity provision. If PF is calculated only up to the wage ceiling (₹25,000 since 17 September 2026), take-home may not change at all. Many companies restructure CTC so the total cost stays the same.
What else changes
| Area | Earlier position | Under the codes |
|---|---|---|
| Wage base for PF and gratuity | Often basic plus DA only | At least 50 percent of total pay |
| Gratuity for fixed-term employees | Five years of service | One year of service, pro rata |
| Settlement after exit | Set by company policy | Dues payable within two working days of leaving |
| Minimum wages | Only scheduled employments | All employees covered, with a national floor wage |
| Statutory bonus | Payment of Bonus Act, 1965 | Now under the Code on Wages, with the same ₹21,000 and ₹7,000 limits |
| Gig and platform workers | Outside most social security law | Brought into social security |
What the 2026 Central Rules add
- ✓An eight-hour working day for daily-wage employees and a 48-hour week for others
- ✓Dearness allowance revised twice a year, linked to the Consumer Price Index
- ✓Paid weekly rest days, with double wages for work on a rest day
- ✓A minimum bonus of 8.33 percent of wages, and up to 20 percent where the surplus allows
- ✓A digital framework for employer compliance
- ✓Operating procedures for EPF, ESI, gratuity, maternity benefit and gig worker schemes under the Social Security Rules
State rules follow their own timelines. Some states have notified all four codes and many are still at the draft stage.
What to do now
- ✓Run your salary structures through a wage-definition check.
- ✓Decide with finance whether to hold CTC steady or let employer cost rise.
- ✓Update your exit process so final settlement can be paid within two working days.
- ✓Review fixed-term contracts and how gratuity accrues on them.
- ✓Check your state's rules, since the central rules are only part of the picture.
None of this replaces advice from a labour law consultant.
Sources
Written by
HR Manager, Airwix Technologies (Sleet)
Nihit Dobariya is the HR Manager at Airwix Technologies in Ahmedabad, where he runs HR and payroll for the team behind Sleet. He writes about payroll, PF and ESIC, professional tax, the labour codes and everyday HR practice for Indian employers, and checks each rule against the official notification before it is published.
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