New Labour Codes: 7 Payroll Changes Every Indian Employer Must Make

What changed on 21 November 2025

Twenty-nine central labour laws were folded into four Codes: the Code on Wages, the Industrial Relations Code, the Code on Social Security and the Occupational Safety, Health and Working Conditions (OSH) Code. For payroll, the biggest shift is a single definition of “wages” used everywhere.

1. The 50% wage rule

“Wages” include Basic, DA and retaining allowance. HRA, conveyance, overtime, bonus, commission and similar items are excluded — but if the excluded items exceed 50% of total remuneration, the amount above 50% is added back to wages.

Action: review every salary structure. Many employers now set Basic (+ DA) at 50% of gross.

2. Full and final within two working days

Under the Code on Wages, wages due to an employee who resigns, is removed, dismissed or retrenched must be paid within two working days. Build an exit workflow that calculates the settlement as soon as the last working day is known. See our full and final settlement guide.

3. Gratuity for fixed-term employees after one year

Fixed-term employees become eligible for gratuity on a pro-rata basis after one year of continuous service, instead of five. Permanent employees remain on the five-year rule (except in death or disablement).

4. Overtime at twice the rate

Work beyond normal hours must be paid at least twice the ordinary rate of wages. Normal working hours under the OSH Code are 8 hours a day and 48 hours a week, with state rules setting details. See overtime and fines policy.

5. Appointment letters

Every employee must receive an appointment letter stating designation, wages and other basic terms. Keep a template and record when each employee accepted it.

6. Timely payment of wages

For a monthly wage period, wages must be paid before the end of the seventh day of the following month. Lock attendance and process payroll early enough to make this date.

7. Registers and records

Registers of employees, wages and deductions can be maintained electronically. Make sure your payroll keeps month-wise records that can be produced on demand.

Payroll checklist

• Recalculate PF, ESI and gratuity wages with the 50% add-back.
• Reprice overtime at 2× where needed.
• Set up an exit workflow that pays within two working days.
• Enable gratuity accrual for fixed-term staff from year one.
• Issue appointment letters and store acceptance.

pagar karo applies the Code wage definition per component (you choose which components are wages), prices overtime from your shift rules and settles exits with a full-and-final statement.

Frequently asked questions

When did the Labour Codes come into force?

The Code on Wages 2019, the Industrial Relations Code 2020, the Code on Social Security 2020 and the Occupational Safety, Health and Working Conditions Code 2020 came into force on 21 November 2025. Some state rules and schemes are still being notified.

Does the 50% rule reduce take-home salary?

It can. If Basic was low and allowances high, more pay becomes “wages”, raising employee PF (unless restricted to the ceiling) and therefore lowering take-home. Employer PF and gratuity costs rise too.

Do I have to restructure salaries?

Not necessarily, but you should check every structure. Where allowances exceed half of pay, either raise Basic or accept the add-back in PF/ESI/gratuity calculations.

This guide is general information for employers in India, checked against the sources above on 28 Oct 2026. Rules and rates change — confirm with your CA or the official notification before acting.