India’s New Labour Code May Lower Take-Home Pay Despite Stable CTCs

India’s upcoming labour code has renewed discussion around salary structures and employee compensation. The regulation mandates that wages must account for a minimum of 50% of an employee’s total cost to company (CTC).

While this does not automatically require employers to increase basic pay, it changes how various salary components are classified. As a result, employees may experience a decline in take-home pay due to higher statutory deductions.

Wage Definition Under the Labour Code

The labour code introduces a revised definition of wages that limits the extent of exclusions from total compensation. Components such as house rent allowance, conveyance allowance, performance incentives, leave travel allowance and employer retirement contributions are treated as exclusions.

If these exclusions together exceed 50% of CTC, the excess amount is added back to wages by definition. This rule effectively increases the wage base even if headline salary figures appear unchanged.

Impact on Provident Fund and Gratuity

A higher wage base directly raises statutory contributions linked to wages, particularly the provident fund and gratuity. Both employee and employer PF contributions are calculated as a percentage of wages, while gratuity obligations also rise with higher wage levels.

This increase in compulsory contributions can reduce the employee’s take-home salary. For example, at a ₹15 lakh annual CTC, the reduction in take-home pay could reach up to ₹52,000 annually due to higher deductions.

Likely Approach to Salary Restructuring

Companies are expected to adopt a calibrated restructuring strategy rather than simply raising basic pay to 50% of CTC. Increasing basic salary upfront could significantly raise employer costs and reduce monthly net salaries for employees.

On the other hand, keeping basic pay too low is not practical because components such as house rent allowance are linked to it. As a result, employers are likely to rebalance fixed pay, allowances and benefits to comply with the definition while maintaining overall cost discipline.

Tax Regime Considerations for Employees

The effect of the new wage structure will differ depending on the tax regime chosen by employees. Under the old tax regime, higher PF contributions may partially offset reduced take-home pay through deductions.

In contrast, the new tax regime provides limited relief despite offering a higher standard deduction of ₹75,000. Consequently, employees under the new regime may experience a more visible decline in monthly net income compared to those using the old structure.

Read More: Say Goodbye to Confusion with Simpler Tax Filing Rules.

Conclusion

The new labour code is focused on redefining wages rather than boosting overall compensation. While basic pay and total CTC may not rise materially, the redistribution of salary components is expected to raise statutory contributions.

This shift is likely to reduce take-home pay while increasing long-term savings through provident fund and gratuity. For employees, the change represents a trade-off between immediate income and enhanced retirement-linked benefits.

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