New labour codes explained for employees: the 50% wage rule, gratuity after 1 year for fixed-term staff, overtime, leave — and what changes on your payslip
The four labour codes (Wages 2019, Industrial Relations 2020, Social Security 2020, OSH 2020) came into force on 21 November 2025, replacing 29 old labour laws. The big payslip change is the 50% rule: if your allowances exceed 50% of total pay, the excess is added back to “wages” (basic + DA + retaining allowance) for PF, gratuity and other statutory dues — which can raise those and slightly lower take-home pay. Fixed-term employees now get gratuity after 1 year (permanent staff still need 5 years). Gratuity on the new wage definition applies from 21 Nov 2025; the maximum stays ₹20 lakh. Overtime is paid at twice the normal rate.
Key facts Last verified: 15 Oct 2026
| Item | Details | Source |
|---|---|---|
| In force from | 21 November 2025 — Code on Wages 2019, IR Code 2020, Code on Social Security 2020, OSH&WC Code 2020; 29 laws merged | PIB — Ministry of Labour, 21 Nov 2025 |
| “Wages” | Basic pay + DA + retaining allowance; if other allowances exceed 50% of all remuneration, the excess is added to wages | Labour Ministry FAQs (30 Dec 2025), Q2–Q4 |
| Not part of wages | Performance incentives, ESOPs, variable pay, reimbursements; leave encashment is not an “allowance” | Labour Ministry FAQs, Q3, Q5; Additional FAQs Q4 |
| Gratuity on new wages | Applies from 21 Nov 2025 (prospective); maximum ₹20 lakh | Labour Ministry FAQs, Q8, Q12 |
| Fixed-term employees | Gratuity after 1 year of service under the contract; benefits equal to permanent staff | Additional FAQs (16 Mar 2026), Q14, Q19 |
| Overtime | Over 8 hours a day or 48 a week → twice the normal wage rate | Additional FAQs, Q24 |
| Leave (workers) | Carry forward up to 30 days; refused leave carried forward without limit; leave over 30 days encashable at year-end | Additional FAQs, Q21, Q26 |
| Rules | Old rules continue during transition to the extent they match the Codes | Labour Ministry FAQs, Q1 |
Neha works in Pune on a ₹76,000-a-month package. Her basic + DA is only ₹20,000; the rest is allowances. After the labour codes came in, HR told her that her “wages” for PF and gratuity are now ₹22,000, not ₹20,000. That is exactly the example the Labour Ministry uses to explain the new 50% rule.
The 50% wage rule, with the Ministry’s own example
“Wages” under the codes = basic pay + dearness allowance (DA) + retaining allowance. If everything else (allowances) is more than 50% of total pay, the extra above 50% is added to wages for statutory purposes.
| Item | Amount (per month) |
|---|---|
| Total remuneration | ₹76,000 |
| Basic + DA | ₹20,000 |
| Allowances | ₹40,000 |
| Other components (gratuity, retrenchment compensation — excluded) | ₹16,000 |
| Allowances counted (₹40,000 + ₹16,000) | ₹56,000 |
| Maximum allowances allowed (50% of ₹76,000) | ₹38,000 |
| Excess over 50% | ₹2,000 |
| Wages for statutory calculations | ₹20,000 + ₹2,000 = ₹22,000 |
Source: Labour Ministry FAQs (30 Dec 2025), Q7. Statutory dues such as gratuity are then calculated on ₹22,000.
What is not counted as “wages”: annual performance incentives, ESOPs, the variable part of pay, reimbursements, and leave encashment (not an allowance). Overtime *is* counted among the components for the 50% test.
What changes on your payslip
| Item | Effect for many employees |
|---|---|
| Basic + DA share | Employers often raise basic to about 50% of CTC to stay compliant |
| PF | PF is a % of wages; higher wages can mean higher PF (both shares). EPF also has a separate ₹25,000 wage ceiling from 17 Sep 2026 — see PF wage ceiling ₹25,000 |
| Gratuity | Calculated on higher wages from 21 Nov 2025 → bigger gratuity at exit |
| Take-home pay | Can fall slightly if PF and gratuity provision come out of the same CTC |
| Total CTC | Not required to change; the split changes |
Check your own numbers with the in-hand salary calculator and EPF calculator.
Gratuity: what changed
| Point | Rule under the codes |
|---|---|
| Fixed-term employees | Eligible after 1 year of service under the contract (counted from the contract start) |
| Permanent employees | Still 5 years of continuous service (not needed on death or disablement) |
| Formula | 15 days’ wages for each completed year (or part over 6 months), on last-drawn wages |
| Which wages | New wage definition (with the 50% rule), from 21 Nov 2025 |
| Maximum | ₹20 lakh (as notified by the Central Government) |
| Contract labour via a contractor | The contractor (employer) pays gratuity after 5 years |
Gratuity on the new wages applies prospectively — from 21 November 2025, the date of enforcement. Use our gratuity calculator for the formula.
Working hours, overtime and leave
- Working hours: 8 hours a day / 48 hours a week.
- Overtime: work beyond 8 hours a day or 48 a week is paid at twice the normal wage rate, at the end of the wage period. Employees whose minimum wage is fixed under the Code on Wages are eligible.
- Leave (for “workers”): carry forward up to 30 days to next year; leave you applied for but were refused carries forward without limit. Leave above 30 days that was refused can be encashed at year-end, and leave at your credit is encashed when you leave the job. These leave provisions cover workers and supervisors earning up to ₹18,000 a month; managers follow company policy.
- Free annual health check-up for workers over 40; appointment letters for all; women allowed in night shifts with consent and safety measures.
Rules are still being finalised. Until new rules are notified, the old rules continue wherever they don’t conflict with the codes. States make their own rules for establishments under them. Your HR may change salary structures in stages — ask for the written revised structure.
Tax side: leave encashment and gratuity
Labour law decides how much you get; income-tax law decides how much is tax-free. Private-sector leave encashment on retirement is tax-free up to ₹25 lakh — see leave encashment tax. Gratuity tax limits are in the gratuity calculator.
Frequently asked questions
When did the new labour codes come into force?
On 21 November 2025. The Code on Wages 2019, Industrial Relations Code 2020, Code on Social Security 2020 and OSH&WC Code 2020 replaced 29 older labour laws.
What is the 50% rule in the new labour code?
“Wages” means basic pay, DA and retaining allowance. If other allowances exceed 50% of total remuneration, the excess is added back to wages for PF, gratuity and other statutory calculations.
Will my take-home salary reduce under the new labour codes?
It can, slightly, if your basic was low and the employer keeps CTC the same — PF and gratuity on higher wages come out of the same CTC. Your retirement savings and gratuity go up.
Do fixed-term employees get gratuity after 1 year?
Yes. A fixed-term employee is eligible for gratuity after rendering one year of service under the contract, counted from the start of the contract. Permanent employees still need 5 years.
Is the new gratuity calculation retrospective?
No. Gratuity based on the revised definition of wages applies from 21 November 2025, the date the codes came into force.
Is overtime paid at double rate?
Yes. Work beyond 8 hours a day or 48 hours a week is paid at twice the normal wage rate for eligible employees.
Official links
Use only these government websites. HumainOne is not connected to any of them.
- PIB — Four Labour Codes made effective21 Nov 2025, key changes
- Labour Ministry FAQs on Labour Codes (30 Dec 2025)Wages, 50% rule, gratuity
- Additional FAQs (16 Mar 2026)Fixed-term, overtime, leave
- Ministry of Labour & EmploymentCodes, rules, notifications
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