New labour codes unlikely to hit salary hikes, but IT sector may see softer increments
India's four new Labour Codes, which came into effect on 21 November 2025, have increased employer costs for benefits like gratuity and overtime
Despite higher compliance costs, most companies are unlikely to reduce salary hikes for FY2026-27 due to strong labour demand, though the IT sector may see softer increments
The Codes replace 29 legacy labour laws with a unified framework covering wages, social security, industrial relations, and occupational safety
The redefined "wages" (with the 50% rule) means basic pay must constitute at least 50% of gross salary, affecting PF, gratuity, and bonus calculations
Companies are navigating a dual compliance environment as state-level rules and digital infrastructure are still being finalised
The Four Labour Codes — Overview
India's labour law reform consolidated 29 central labour laws into four comprehensive Codes, all effective from 21 November 2025: (1) Code on Wages, 2019; (2) Industrial Relations Code, 2020; (3) Code on Social Security, 2020; and (4) Occupational Safety, Health and Working Conditions Code, 2020. The reform was driven by the need to simplify India's fragmented labour law framework, improve ease of doing business, and extend social security to the informal economy including gig and platform workers.
Key Details
- Code on Wages, 2019: Consolidates 4 laws (Minimum Wages Act, Payment of Wages Act, Payment of Bonus Act, Equal Remuneration Act); introduces universal minimum wage and the 50% salary rule
- Code on Social Security, 2020: Consolidates 9 laws; extends coverage to gig workers, platform workers, and unorganised workers; introduces gratuity eligibility after 1 year for fixed-term employees (down from 5 years)
- Industrial Relations Code, 2020: Consolidates 3 laws (Industrial Disputes Act, Trade Unions Act, Industrial Employment Act); raises threshold for government approval for layoffs/retrenchment from 100 to 300 workers
- Occupational Safety, Health and Working Conditions Code, 2020: Consolidates 13 laws; applies to establishments with 10+ workers; mandates annual health check-ups for workers above 40
The article assesses the real-world salary impact now that these Codes have been in force for approximately three months, finding that the increased compliance costs are being absorbed by most employers rather than passed on through reduced salary hikes.
The 50% Wages Rule and Its Impact on Take-Home Pay
Under the Code on Wages, 2019, "wages" are defined to include basic pay, dearness allowance, and retaining allowance, with all other allowances (HRA, overtime, bonuses) excluded — but capped at 50% of total remuneration. If excluded components exceed 50%, the excess is reclassified as "wages." This means basic pay must effectively be at least 50% of gross salary, significantly increasing the base on which statutory contributions (PF, ESI, gratuity, bonus) are calculated.
Key Details
- Pre-reform: Many companies structured basic pay as low as 30-35% of gross salary to minimise PF/ESI contributions
- Post-reform: Basic pay must be at least 50% of total remuneration
- Impact: Higher employer contributions to PF (12% of basic), ESI, and gratuity; higher employee PF deductions reduce take-home pay
- Estimated 25-50% increase in gratuity liabilities for most companies
- Overtime wages mandated at double the normal rate
The restructured salary definition is the primary mechanism through which the new Codes increase employer costs, and the article's finding that most sectors will absorb these costs reflects a tight labour market where talent retention takes priority over cost-cutting.
Gratuity Under the New Social Security Code
Gratuity is a statutory retirement benefit payable to employees upon completing a qualifying period of service. Under the Payment of Gratuity Act, 1972 (now subsumed into the Social Security Code, 2020), gratuity was payable after 5 years of continuous service. The Social Security Code introduces a landmark change: fixed-term employees are now eligible for gratuity after just 1 year of continuous service, recognising the rise of contract and project-based employment in India's evolving labour market.
Key Details
- Gratuity formula: (Last drawn wages x 15 x years of service) / 26
- Maximum gratuity under the Code: Rs 25 lakh (enhanced from Rs 20 lakh)
- Fixed-term employee eligibility: 1 year (reduced from 5 years under the old law)
- Gratuity applies to establishments with 10 or more employees
- Gig and platform workers to receive social security benefits through a dedicated fund, though gratuity provisions for them are still being operationalised
The reduced gratuity eligibility threshold is a major cost driver for IT and services companies that rely heavily on fixed-term and project-based employment, which explains the anticipated softer increments in the IT sector specifically.
- Four Labour Codes effective from: 21 November 2025
- Number of legacy laws replaced: 29
- 50% rule: Basic pay must be at least 50% of total remuneration
- Gratuity eligibility for fixed-term employees: reduced from 5 years to 1 year
- Maximum gratuity: Rs 25 lakh
- Overtime wages: mandated at double the normal rate
- Salary release deadline: 7th of every month
- Layoff/retrenchment government approval threshold: raised from 100 to 300 workers
- Estimated gratuity liability increase: 25-50% for most companies
- Social security now covers gig and platform workers for the first time