New Labour Codes 2025: Salaried Employees Face Salary Uncertainty as Implementation Awaits Government Notification

For salaried employees heading into appraisal discussions this year, the key questions at the centre of performance and compensation review are: how will the new labour codes 2025 impact their take-home salaries? Will employers incorporate the newly enhanced tax-exempt allowances, such as children's education expenses and hostel fees, into cost-to-company (CTC) packages? The answer, for now, is that most companies are readying themselves for a rollout, and are yet to implement the changes.

Many employers are stopping short of a full rollout as they await the central government's notification of the final rules that will govern implementation, say human resources and payroll professionals. Several states, too, are yet to notify their rules. "Most organisations are currently in a wait-and-watch mode. While they have run internal simulations and scenario planning around the new labour codes and updated income tax rules, widespread structural changes to the salary structures have not yet been fully implemented. This is largely because final rules, state-level notifications, and clarity on timelines are still evolving," says Balasubramanian A., Senior Vice President, TeamLease Services, a staffing solutions firm.

Moreover, every state will draft and notify rules covering procedural aspects such as wage ceilings, dispute resolution timelines, inspector authority and exemptions for smaller establishments. "States cannot alter or contradict core substantive provisions. Uniformity is mandated by Section 9 of each code, with central government oversight," says Alay Razvi, Managing Partner with law firm, Accord Juris. Since labour is a concurrent subject, state-level notifications are essential for full implementation. "As a result, many employers are deferring formal restructuring to avoid multiple iterations. Some are even preparing to implement changes with retrospective effect once the rules are finalised," says chartered accountant Bhavesh Shah, Senior Partner, Hasmukh Shah & Co LLP, a firm providing outsourced accounting and tax services, including payroll processing. "Some organisations have started the process of revising compensation structure and aligning with the new labour codes as well as income tax rules," adds Malathi K.S., Director, Rewards and Consulting, Products and Global Mobility Practice, Mercer, an employee benefits and consulting company.

As per the rules, employers have to take into account 50% of an employee's CTC to compute social security benefits–employees' provident fund, gratuity, and employees' state insurance component, will be linked to this figure. If remuneration is not revised upward, higher gratuity and EPF contributions can reduce the take-home pay. "One of the key shifts under the labour codes is the expanded definition of 'wages', which effectively requires a larger portion of compensation to be treated as fixed pay. While this is often interpreted as a 50% threshold for basic wages, in practice it operates as a compliance principle that limits the excessive use of allowances," says Sachin Biraj, General Counsel, Legal and Regulatory Affairs, Randstad India, a talent company.

For employees, the immediate concern is: will the monthly in-hand salary fall as Employees' Provident Fund (EPF) and gratuity—both calculated as a percentage of wages—increase? Higher basic pay automatically raises provident fund and gratuity-linked contributions. While this may reduce monthly take-home pay, it can strengthen long-term savings."In organisations where EPF is calculated as a percentage of actual basic pay, this will lead to a higher contribution towards retirement benefits. Consequently, while the overall CTC may remain the same, the higher allocation toward statutory and retirement components can result in a lower take-home salary for employees," says Archit Gupta, Founder and CEO, ClearTax. "There will be reduced flexibility in salary structuring, limiting the use of allowances for tax optimisation," adds Shah.

For households already juggling home loan equated monthly instalments (EMIs), school fees and systematic investment plans (SIPs), even a modest dip in monthly liquidity can alter financial planning. According to Balasubramanian, employees' CTC structure may become fixed-heavy, with basic pay forming at least 50% of total compensation. "While employees may feel a short-term impact on their in-hand salary, the trade-off is higher long-term social security benefits through increased PF and gratuity contributions," he says. To be sure, depending on your employer's policies, you can choose to restrict the EPF contribution to 12% of Rs.15,000, which is Rs.1,800 per month–to cushion the blow to your take-home salary.

In addition to the widely-discussed provident fund and gratuity obligations, the new codes will also affect Employees' State Insurance (ESI) contributions. "Employees who were not covered under ESI due to their monthly wages being less than Rs.21,000 will now be covered for ESI contributions as a result of the definition of 'wage' under the new labour codes," adds Ahetesham Ahmed A Thaver, Associate Partner, ALMT Legal.

Add to this mix the new income tax rules that came into effect from 1 April, and it is clear why the appraisal season this time round is not business as usual. "Organisations are viewing this as an opportune time to look at compensation design as, along with the labour codes, certain income tax provisions and changes to perquisite rules have already come into effect from 1 April, prompting them to evaluate the payroll in the new tax year 2026-27," says Parizad Sirwalla, Partner and National Head – Tax, Global Mobility Services KPMG in India.

The new tax regime has gained a clear upper hand since Budget 2025, but the recent changes to the income tax rules have brought the old regime back into focus. This is because the rules have raised the tax-exempt limit on multiple allowances, including children's education (Rs.3,000 per month per child; maximum two children) and hostel fees (up to Rs.9,000 per month per child), which are available only under the old regime. Meal benefit (up to Rs.200 per meal) is now available under both regimes. Apart from this, taxpayers living on rent in Bengaluru, Ahmedabad, Pune and Hyderabad are now eligible to claim house rent allowance exemption of up to 50% of basic, up from 40%.

If, after careful comparison of the two regimes and labour codes impact, you find that the old regime will be beneficial overall, you can negotiate with your employer to incorporate children's education and hostel allowance into your pay package, your employer's policies permitting. "Employees can also explore reimbursement-based components (such as fuel reimbursements), wherever feasible, subject to company policies," says Shah. Look at three specific numbers: likely revised take-home salary post-labour codes implementation, annual tax outgo under both regimes, and retirement contributions. "Focus on higher total CTC and useful benefits, not salary breakup, because the room to play with structure is much smaller now," adds Sarbojit Mallick, Co-founder, Instahyre, a job search platform. To start with, estimate your expected gross income during the financial year, and identify the allowances and exemptions that can reduce your taxable income. "Compare your tax liability under both the old and new tax regimes and choose the one that results in lower overall tax outflow. Based on this, negotiate the structure of your salary components," says Gupta of ClearTax.