Labour Codes Explained: Unified Definition of Wages, 50% Allowance Rule & Gratuity Impact (India)
India’s new Labour Codes mark a major shift in how employee compensation, statutory benefits, and employer compliance are structured. This article should be read in continuation of our earlier insight on New Labour Codes 2025, where we explained the overall framework and implementation roadmap. Here, we focus specifically on the definition of wages, the 50% allowance rule, and gratuity implications for employers. One of the most significant changes is the uniform definition of “wages” across all four Labour Codes and its direct impact on PF, ESI, bonus, and gratuity calculations.
This article explains the changes in simple terms, clarifies the 50% allowance rule, and answers the most common employer and HR questions.
Why This Change Matters for Employers
For a complete overview of the four Labour Codes and their scope, you may also refer to our earlier article: New Labour Codes 2025 https://vizttax.com/insights/new-labour-codes-2025/
Earlier, different labour laws defined wages differently, allowing high allowance structures to reduce statutory liabilities. The new Labour Codes remove this ambiguity by introducing one standard definition of wages, ensuring transparency and fair social security coverage for employees.
For businesses, this means:
- Re evaluation of salary structures
- Possible increase in statutory outgo
- Need for advance compliance planning
In simple terms, MIS turns your accounting data into actionable business intelligence.
Uniform Definition of “Wages” Under Labour Codes
Under the Code on Wages, 2019 (effective 21 November 2025), wages include:
Included Components
- Basic Pay
- Dearness Allowance (DA)
- Retaining Allowance (if any)
Excluded Components (subject to limits)
- House Rent Allowance (HRA)
- Conveyance allowance
- Bonus
- Commission
- Overtime
- Employer contribution to PF & pension
- Gratuity and retrenchment compensation
- Performance incentives, ESOPs, reimbursements
However, exclusions are not unlimited.
The 50% Allowance Rule Explained
That added portion becomes wages for all statutory calculations.
Illustration
- Total monthly remuneration: ₹76,000
- Basic + DA: ₹20,000
- Allowances: ₹40,000
- Other components (gratuity etc.): ₹16,000
- Total allowances considered: ₹56,000
- Maximum allowed (50% of remuneration): ₹38,000
- Excess allowance: ₹2,000
- Performance incentives, ESOPs, reimbursements
Revised wages for statutory purposes: ₹22,000
Applicability Across All Labour Codes
This single definition of wages applies uniformly to:
- Code on Wages, 2019
- Industrial Relations Code, 2020
- Social Security Code, 2020
- Occupational Safety, Health & Working Conditions Code, 2020
This directly affects:
- PF & ESI
- Bonus
- Gratuity
- Retrenchment compensation
Gratuity: Key Changes & Clarifications
When is Gratuity Payable?
Gratuity becomes payable on:
- Termination
- Superannuation
- Resignation
- Death or disablement
- Expiry of fixed term employment
Five‑Year Rule – Exceptions
Five years of continuous service is not required in cases of:
- Death
- Disablement
- Fixed term employment completion
Gratuity Calculation
- 15 days’ wages for every completed year of service (or part exceeding six months)
- Maximum gratuity limit: ₹20 lakhs (as currently notified)
- Applicable prospectively from 21 November 2025
Existing better terms under agreements or awards remain protected.
Impact on Employers & HR Teams
Employers should:
- Review salary structures immediately
- Avoid excessive allowance heavy pay models
- Assess increased PF, ESI, and gratuity exposure
- Update payroll systems and employment contracts
Early restructuring helps avoid sudden compliance shocks.
Frequently Asked Questions (FAQs)
1. Will old rules apply during the transition period?
Yes. Existing rules continue until new rules are notified, to the extent they align with the Labour Codes.
2. Does leave encashment form part of wages?
No. Leave encashment is excluded from wages.
3. Does the wage definition apply to all labour laws?
Yes. The definition applies uniformly across all four Labour Codes.
4. Is gratuity applicable retrospectively?
No. Gratuity under the new wage definition applies prospectively from 21 November 2025.
5. Who is excluded from the definition of ‘worker’?
Supervisory employees drawing wages above ₹18,000 per month (or such amount as notified) are excluded.
How This Article Complements Our Earlier Labour Codes Insight
While our earlier article on New Labour Codes 2025 explains what the new codes are and when they apply, this article addresses the most practical employer concern:
- How salary structures will change
- How statutory costs may increase
- How gratuity and social security calculations will be impacted
Together, both articles provide a complete compliance picture for business owners, HR heads, and CFOs.
Need Help with Labour Code Compliance?
Labour Code compliance is not just a legal requirement—it directly affects cost structures and employee trust.
Vizttax assists businesses with:
- Salary restructuring under Labour Codes
- Payroll & gratuity impact analysis
- Compliance advisory & implementation support
- Compliance & tax monitoring
Connect with Vizttax for expert labour law compliance guidance.