How the New Labour Codes Will Impact Existing Salary Structures

India’s labour law reforms represent a comprehensive consolidation of 29 Central Labour Acts into four unified codes:

• Code on Wages, 2019

• Industrial Relations Code, 2020

• Occupational Safety, Health and Working Conditions Code, 2020

• Code on Social Security, 2020

While each of these codes is expected to play a distinct role in shaping the employment landscape, the most significant impact on salary structures is likely to stem from the redefined understanding of wages under the Code on Wages, 2019 and the expanded social security framework under the Code on Social Security, 2020.

Together, these reforms aim to standardize wage definitions, strengthen employee benefits, improve wage governance, and reshape how employers design compensation structures

The core change: a redefined understanding of wages

Historically, salary structuring in India has allowed considerable flexibility. Employers have typically optimized compensation by maintaining a lower basic salary and distributing the remainder across allowances such as HRA, conveyance, and special pay. This approach has helped manage statutory liabilities while preserving employee take-home income.

Under the new framework, this flexibility is expected to reduce significantly.

A key threshold is proposed:

• Allowance allocation is expected to be capped at 50% of total remuneration

• Core wage components (Basic Pay, Dearness Allowance, and Retaining Allowance) are expected to constitute at least 50% of total CTC

• Any excess allowance structure is likely to be treated as wages for statutory purposes

This shift is expected to standardize compensation structures and reduce fragmented salary design across organizations.

How existing salary structures are expected to change

Most current salary structures in India allocate 30–40% of CTC to basic pay, with the remaining portion distributed across allowances.

Under the proposed framework, this structure is expected to undergo significant realignment.

Basic pay is likely to form a larger share of total compensation, while allowance-heavy structures may require recalibration. Any excess allocation toward allowances is expected to be reclassified as wages, regardless of structuring on paper.

This leads to a structural shift:

• Salary structures will need to be redesigned to align with wage thresholds

• A higher portion of compensation will move into statutory calculations

• Flexibility in compensation structuring is expected to reduce

In practice, organizations are likely to realign salary structures to comply with the revised definition of wages once the framework is fully implemented.

Minimum wages move toward standardization

The Code on Wages, 2019 is expected to introduce a floor wage framework, enabling the central government to define a baseline minimum wage across regions.

States may continue to set higher wages, but they are not expected to go below the prescribed floor wage.

This is likely to introduce greater consistency in wage governance while increasing compliance requirements for employers operating across multiple states.

Overtime calculation approach

Before the implementation of the Labour Codes, overtime calculation has varied across companies and sectors due to differing wage definitions under multiple laws.

Under the proposed framework, overtime computation is expected to become more standardized and linked to defined wage components and hours worked beyond prescribed limits.

The formula is generally represented as:
2 × (Basic + DA ÷ working days × daily hours) × overtime hours

Organizations may need to:

• Review salary structures in lower wage bands

• Track state-wise wage revisions more closely

• Reassess wage bench marking across locations

Wage compliance is expected to become more standardized but also more tightly regulated.

The immediate impact: cost and payroll realignment

With a higher proportion of salary expected to be classified as wages, payroll structures are likely to be impacted.

Statutory contributions such as provident fund and gratuity are calculated based on wage components. As these components increase, employer liabilities are expected to rise over time.

Organizations may see:

• Higher employer contribution outflows

• Increased gratuity provisioning

• A shift in internal CTC cost distribution

Expanded gratuity coverage for fixed-term employees

The Code on Social Security, 2020 is expected to extend gratuity benefits to fixed-term employees by removing the traditional five-year continuous service requirement.

Gratuity for fixed-term employees is expected to be calculated on a pro-rata basis, based on the duration of employment, making it a time-linked benefit rather than a long-tenure entitlement.

This is likely to expand benefit obligations for organizations engaging contract or fixed-term talent.

Implications may include:

• Increased gratuity exposure across short-term roles

• Higher benefit calculations in payroll cycles

• Reassessment of fixed-term hiring costs

Inclusive social security for emerging work models

Social security coverage is expected to be widened to include gig and platform workers, marking a shift toward a more inclusive framework beyond traditional employment structures.

This expansion is likely to strengthen access to benefits such as provident fund, employee insurance, and other statutory protections across a broader workforce base.

From flexibility to uniform compliance in payroll

A long-standing challenge in Indian payroll compliance has been inconsistent wage definitions across laws, leading to varying interpretations in salary structuring.

The Labour Codes are expected to introduce a unified wage standard, shifting compliance from interpretation-based flexibility to stricter adherence.

This standardization is likely to reduce flexibility in compensation design but bring greater clarity and consistency across organizations.

As a result, payroll operations are expected to become more demanding. Systems may need to validate wage structures continuously, ensure threshold compliance, monitor minimum wage adherence, and calculate statutory contributions with higher accuracy. For large organizations, payroll is likely to become a precision-driven function requiring automation, consistency, and scalability.

Payroll software solutions such as Zoho Payroll can support organizations in managing structured compliance and statutory calculations at scale.

The employee lens: perception vs reality

While these changes are intended to strengthen long-term financial security, their immediate impact may be perceived differently by employees.

As wage components increase:

• Provident fund contributions are expected to rise

• Take-home salary may see a marginal reduction

Without proper communication, this may lead to misunderstanding. Clear communication is expected to be essential in helping employees understand that these changes are regulatory in nature and aimed at improving long-term financial stability.

Conclusion

Adapting to the new labour framework will require a structured review of salary structures, alignment with the revised definition of wages, and reassessment of statutory and compliance obligations. Payroll processes will also need to be strengthened to ensure accuracy, consistency, and scalability as the regulatory framework evolves.

Software such as Zoho Payroll can support organizations in managing these transitions through structured compliance workflows and statutory processing capabilities.

Overall, the Labour Codes are expected to bring greater clarity and standardization to India’s employment framework, gradually repositioning payroll from a routine administrative function to a strategic lever influencing compliance, cost management, and workforce planning.