With the New Labour Codes officially active, many Indian MSMEs are discovering that their old salary structures are now a legal liability. What is the most significant change? The 50% Wage Definition.
For decades, many Indian businesses optimized their payroll by keeping the “Basic Salary” low (often 20–30% of the CTC) and inflating allowances to reduce Provident Fund (PF) and Gratuity liabilities.
As of late 2025, that strategy is officially a compliance risk.
What is the 50% Rule under New Labour Codes?
Under the Code on Wages, a uniform definition of “Wages” has been introduced. The rule is simple but impactful: your Basic Pay + Dearness Allowance (DA) must constitute at least 50% of the total remuneration.
If your allowances (HRA, Special Allowance, etc.) exceed 50% of the total CTC, the excess amount is automatically added back to the “Wage” for statutory calculations.
How it Affects Your Business (Example)
| Component | Old Structure (Pre-2026) | New Structure (2026) |
| Basic Salary | ₹15,000 (25%) | ₹30,000 (50%) |
| Allowances | ₹45,000 (75%) | ₹30,000 (50%) |
| PF Contribution | Lower | Higher |
| Take-Home Pay | Higher | Slightly Lower |
The Result: Your statutory “Wage” base for PF and Gratuity is now ₹30,000.
Why this matters: While the employee’s retirement corpus (PF) and eventual Gratuity grow faster, their monthly take-home pay will decrease due to higher mandatory deductions. As a business owner, your employer-side contribution costs will also rise.
Common Questions from MSMEs
Will This Increase Company Costs?
Yes. Since the “Wage” base for PF and Gratuity increases, your employer-side contribution will rise. However, failing to restructure now can lead to massive “back-dated” penalties during a labor inspection.
What is excluded from the 50%?
Specific components like HRA, overtime, and statutory bonuses are excluded—but only up to the 50% cap. Once they cross that threshold, they are “wages.”
Don’t Wait for an Audit to Fix Your Payroll
The cost of non-compliance in 2026 is far higher than the cost of professional outsourcing. Let Biztree handle the “boring” but critical compliance work while you focus on scaling your business.
Ready to see if your current salary structure is compliant? Contact Biztree Today for a Free Compliance Health Check and a personalized quote for your MSME.
