New Labour Code vs Old PF Law: Why Employers Are Struggling With Two Wage Systems

India’s new labour codes have officially come into force, bringing major reforms to how salaries and social-security benefits are calculated. However, the continuation of the old Employees’ Provident Funds and Miscellaneous Provisions Act (EPF Act), 1952 has created a rare overlap. Employers now have to work with two different wage definitions at the same time, leading to widespread payroll and tax confusion.

A New Wage Structure for Most Benefits

The Code on Social Security, 2020 and the Code on Wages, 2019 have reshaped several long-standing rules. 
Key changes include:

• A uniform wage definition for gratuity, ESI and leave encashment.
• A mandatory rule that basic pay, dearness allowance and retaining allowance must form at least 50% of total salary.
• Shorter eligibility for gratuity for fixed-term workers.

This means employers must now redesign salary structures so that basic pay makes up half of the total pay packet.

But PF Still Runs on an Older Definition

Despite these reforms, the EPF Act has not been repealed. This means PF contributions continue to be calculated using an older and narrower definition of “basic wages”. Under this definition, allowances such as HRA, overtime and bonuses are excluded.

As a result, employers must use:

• The new wage definition for gratuity, ESI and leave encashment
• The old EPF wage definition for provident-fund calculations

This dual system was never planned. It has emerged only because the EPF Act is still in force even though other laws have shifted to the new framework.

Salary Restructuring and Tax Challenges

The compulsory 50% rule is not new in spirit. Past court rulings and PF circulars have pushed for similar standards. However, most employers never fully adopted it.

Now that the rule is compulsory under the labour codes, companies must shift towards higher basic pay. This may reduce take-home salaries and affect popular tax-saving allowances such as HRA or LTA.

To balance tax planning with compliance, many employers may keep allowances unchanged for tax purposes but add them back only for PF calculations. This will require maintaining two wage sheets—one for tax and another for PF. While allowed, it demands precise documentation and careful reconciliation.

Where Things Stand

• Employers must redesign salary structures while keeping tax efficiency in mind.
• Employees should expect a lower take-home salary but better long-term PF and gratuity benefits.
• Policymakers need to align PF law with the new social-security system to avoid disputes and confusion.

Read more: 8th CPC Deadline Set for Mid-2027, Leaving 1.2 Crore Employees Anxious About Backdated Pay.

Conclusion

India is transitioning towards a more unified wage system, but PF remains the missing piece. Until the EPF Act is repealed or amended, employers will have to navigate two parallel wage definitions. The reforms aim to strengthen worker protection, but clearer rules are essential to ensure smooth and conflict-free implementation.

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