The labour codes, including the Code on Wages, were passed in 2019, but full implementation still depends on state-level notifications. As of now, the rules haven't been enforced uniformly across India, with no single confirmed rollout date at present. Since there's no confirmed nationwide date, many employers are using the start of the financial year to review and prepare their salary structures. The salary rules could change sooner than you think, making early preparation crucial to avoid rushed decisions. Companies that don't align their current salary setup may face compliance issues over time, as the impact may not show immediately but can affect long-term cost planning and employee understanding of pay structures.
The implementation of new labour codes is fundamentally changing how salaried employees approach tax planning under the new tax regime. According to CA Ruchika Bhagat, MD of Neeraj Bhagat & Co., the new labour codes by mandating a higher basic pay component have indirectly reshaped salary structures, creating a more conscious shift toward structured, compliant tax-saving avenues. As reported by Mint, these changes have transformed what was once perceived as a simple, no-deduction system into a framework driven by prudent compensation design and employer-led benefits. However, the government has pushed for wider adoption of the new tax regime, with nearly 75% of individual taxpayers already opting for it, while exemption thresholds under certain allowances—such as house rent allowance (HRA) and children's education/hostel allowance—under the old tax regime have been increased, requiring employers to design compensation structures that work for employees under both regimes. The new codes will also affect Employees' State Insurance (ESI) contributions, as employees who were not covered under ESI due to their monthly wages being less than ₹21,000 will now be covered for ESI contributions as a result of the definition of 'wage' under the new labour codes, according to Ahetesham Ahmed A Thaver, Associate Partner at ALMT Legal.
The 50% rule is the core of the new salary structure, defining how much of the salary must be treated as wages. Wages must be at least 50% of total remuneration, with wages including basic pay, dearness allowance, and retaining allowance. Certain components can be excluded, but only up to 50% of total salary. If exclusions go beyond 50%, the excess gets added back to wages, directly affecting PF and gratuity calculations. This changes how salary is designed, as many companies earlier kept basic pay low and used allowances, but now that approach needs careful adjustment. The new labour code salary structure comes from the Code on Wages, 2019, introducing a standard definition of wages that all employers need to follow. Earlier, companies had more flexibility in structuring salaries, but now salary components must be aligned with this defined wage structure.
The new labour codes are set to reshape salary structures with varying impacts across different income groups and professional categories. The biggest shift is in the definition of 'wages', which now requires it must form at least 50 percent of total remuneration. This effectively limits the earlier practice of inflating take-home pay through allowances such as House Rent Allowance (HRA), bonuses, commissions and conveyance. Under the new framework, if these exclusions exceed 50 percent, the excess is added back to wages, ensuring that basic pay, dearness allowance and retaining allowance together form a larger share of salary. As per Balasubramanian A. from TeamLease Services, who gains really depends on an employee's current PF contribution and how their salary is structured. Employees with basic pay below 50 percent of CTC will likely see increases, leading to higher PF and gratuity but lower take-home salary, while those already at 50 percent or above may see little to no change. Early-career professionals stand to gain the most from this shift, as their compensation structures are typically less optimised for tax efficiency and more fixed in nature. While there may be a marginal dip in take-home pay due to increased PF contributions, the real upside lies in significantly stronger gratuity and provident fund accumulation over a long career horizon, with the power of compounding working most effectively for this cohort.
Under the new tax regime, the revised labour-code-driven wage structure has significantly boosted tax-free employer contributions to retirement funds, even though Section 80C is not available. CA Chandni Anandan from ClearTax explained that the higher basic pay and expanded PF/NPS-linked benefits have increased the quantum of tax-free employer contributions to retirement funds. According to the experts, employer contributions to NPS (Section 80CCD(2)) remain one of the most powerful tax-saving tools, while car lease arrangements can reduce taxable income when structured correctly. However, with the increase in exempt salary components, individuals will now need to undertake a more detailed optimisation analysis on a case-by-case basis (old vs new), as noted by Shaily Gupta, Partner, Direct Tax at Khaitan & Co. The new tax regime has gained a clear upper hand since Budget 2025, but recent changes to income tax rules have brought the old regime back into focus. Meal benefit (up to ₹200 per meal) is now available under both regimes, while taxpayers living on rent in Bengaluru, Ahmedabad, Pune and Hyderabad are now eligible to claim house rent allowance exemption of up to 50% of basic, up from 40%. Additionally, taxpayers living on rent in Bengaluru, Ahmedabad, Pune and Hyderabad are now eligible to claim house rent allowance exemption of up to 50% of basic, up from 40%.
Meal coupons, gift vouchers, and other non-cash benefits continue to offer tax-efficient perks within prescribed limits, as reported by Mint. The standard deduction now available under the new regime provides direct relief, while meal card benefits remain tax-efficient only if separately structured and documented in payroll. CA (Dr.) Suresh Surana noted that under IT Rules 2026, car lease benefits are taxable perquisites with valuation linked to official vs personal use through prescribed monthly values or actuals. Under the new labour codes, a uniform definition of 'wages' has been introduced, forming the basis for calculating statutory benefits such as provident fund, employee state insurance, gratuity and leave encashment. Companies had only recently completed a detailed review of salary components to determine what qualifies as wages, incorporating changes under the new Income-tax Act has added another layer of complexity. The expanded definition of 'wages' under the new labour codes effectively requires a larger portion of compensation to be treated as fixed pay, often interpreted as a 50% threshold for basic wages, limiting the excessive use of allowances for tax optimisation. Performance based incentives, Employee Stock Option Plans (ESOPs), variable part of the component or reimbursement-based payments to the employee shall not be part of the wages under the new definition, with excess exclusions automatically reallocated to wages, thereby increasing the base for PF and gratuity calculations.
With the introduction of the Income-tax Act 2025 effective from April 1, 2026, taxpayers must adapt to a new statutory framework while FY 2025-26 continues under the Income-tax Act 1961. As reported by Mint, consulting a certified financial advisor becomes nearly indispensable as tax planning evolves from deduction-based strategies to compensation-driven structuring. An expert knowledgeable about both acts can analyze whether the new tax regime aligns with an individual's earning profile and guide salary component restructuring to maximize tax efficiency. The complexity has increased significantly, with companies now having to navigate both labour code changes and income tax framework modifications simultaneously. Most organisations are currently in a wait-and-watch mode, with many employers stopping short of full rollout as they await the central government's notification of final rules, according to Balasubramanian A. from TeamLease Services. Every state will draft and notify rules covering procedural aspects such as wage ceilings, dispute resolution timelines, inspector authority and exemptions for smaller establishments, with states unable to alter core substantive provisions under the new labour codes, as noted by Alay Razvi, Managing Partner with Accord Juris.
