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New India wage code 2022-2023: How will it impact payroll processing?

Client Advisor Team Leader
December 21, 2021

These new reforms will directly impact the salaries, provident fund, and gratuity of central government employees and will affect the salary structure and tax liability of the private working class.

The definition of ‘wage’ in the Wage Code Bill 2019 has been altered. According to the new definition outlined in the New wage code, ‘wages’ or an employee’s monthly basic salary cannot be less than 50% of the net CTC (Cost To Company).

What does this mean for employees?

As a result, basic pay is undergoing change which will also alter the values of other elements like the provident fund contribution and gratuity, as their numbers are dependent on the basic wages. The most immediate effect of this restructuring is that employees will have a lesser take home amount and will contribute more to the retirement pot.

Employees working in the Private Sector will also be affected, with a marginal reduction in the take-home salary.

What is the New wage code 2022, and what does this mean for the salaried class in India?

Introducing new wage code 2022

During the presentation of the Union Budget 2021, the central government of India created four new codes by combining a total of 29 labour laws. The four new codes include the Industrial Relations Code, Code On Occupational Safety, Health and Working Conditions Code, and the New Wage Code.

There have been several modifications to the existing labour laws. However, the biggest change is to the definition of ‘wage’. The new salary code that addresses this modification aims to directly include 50% of the wages into the salary of employees.

At present, a lot of employers reduce the basic salary of their employees and give them more additional allowances to reduce the burden on the company. However, as per the regulations that have been started by this New wage code Act 2022, the basic salary of the employee cannot be less than 50% of the CTC.

The CTC of an employee includes at least four primary components like House Rent Allowance (HRA), basic wage, retirement benefits like PF, National Pension System, and miscellaneous tax-friendly allowances.

According to the new salary code, these elements and allowances provided to the employee should not exceed 50% of the total remuneration paid to the employee. If there is an excess, then the excess amount paid to the employee will be part of the wages.

Currently, the basic salary is in the range of 30-40% of the gross. The allowances make up the balance. But, the new code specifies that the basic salary should be a minimum of 50% of the gross salary. “This provision will make the allowances of most employees come down”, says Sudhir Kaushik, a chief executive from

Let’s see an example to make this easier to understand.

If a person’s salary is 1 Lakh INR per month, then the elements or exclusions mentioned above cannot be more than 50% of the salary. Therefore, the basic wage should be 50,000 INR and companies or firms will have to cut down some allowances so that it does not exceed the 50% limit.

When new wage code will be implemented?

The new wage code is now live and rolling out as of July 2022, impacting the working hours, salary restructuring, and also the PF contribution of the employees.

As per an official report, at least 13 states in India have pre-published drafts on the new wage code 2022. The Centre has completed the process of finalising the draft rules of the new code and the other labour codes in February 2021 and has notified the new wage code on August 8, 2019.

The Central Government wants the States to implement the new salary code along with the other labour codes. This must happen concurrently, as it is linked to the other codes within the system.

Hence, the salary structure of private employees will witness major changes and modifications in 2022 – the primary one being a lower take-home salary and a higher provident fund contribution.

What changes in payroll will now occur with the introduction of the new wage code?

Following are the primary changes in payroll processing due to the new wage code 2022:

Increased contribution for the PF or Provident Fund

According to Daily Tax Analysis, contribution in PF was 12% of basic salary. But given the modifications of the new salary code, the contribution to the provident fund is set to increase significantly, although by how much remains to be seen.

Change in Gratuity Rule

Gratuity is a monetary amount paid by an employer to an employee as a token of appreciation, abiding by the Payment of the Gratuity Act 1972. Gratuity payment is one of the several components that are included in the gross salary of the employee.

As mentioned above, as per the Act, employees are entitled to receive gratuity after 5 years of continuous work in the same entity. Still, as per the New wage code 2022, employees will be entitled to receive gratuity even if they are employed for just one year.

Changes in Salary Structure

With the implementation of the New wage code Bill 2022, CTC will get affected by the increase in the basic salary and if the basic salary of an employee has been less than 50%, it should be increased. Allowances such as leave, travel, overtime and conveyance will be capped to the remaining percentage of the CTC.

Changes in working hours

Although met with excitement, the new wage code allows for the provision of a four-day week, but with the catch that the day lost simply spreads across the remaining four days.

The new rule mandates that the employee clock in for 12 hours a day in order to make up for any lost time. Even if you work four or five days a week, your weekly hours are still capped at 48 hours. The change is designed to make it easier for companies to implement four-day weeks without actually losing a day of work.

There are also new extensions to overtime caps for factory workers, up from 50 hours to 125 hours.

How does the new wage code 2022 impact take-home salary?

Due to the change in the definition of wages, and also the fact that social security elements like the provident fund have now been secured as a percentage of ‘wages’, there will be a change in the total payouts. Experts say that the provident fund of the employees will be deducted more. Hence, the take-home salary will be less, but the future of the employees will be secured.

Depending upon the employment letters and the salary breakup of the current employees, the take-home salary will be significantly affected. Even the TDS Calculations based on the revisions in the take-home will be seriously considered by the employers.

Corporates are dwelling on the idea of a reduced take-home salary. Why? Dr. K.R. Shyam Sundar, Economist and Professor at XLRI, says that “ The New wage code changes the conventional perspective that take-home pay is the most important one.

He adds further, “Employees can now know the fixed component in the pay and can do financial planning. The result will be in the form of a decent sum at the time of retirement.” Therefore, the new reforms can affect the amount of money the employer gets in hand at the end of the month, but it has a positive impact on the future.

Grant Thornton Bharat’s Industry Expectation Survey released in March says that half of the Indian companies are ready to apply the new labour codes.

As experts put it, terminal benefits of the employer will go up due to the higher contribution for social security. To state simply, the new salary codes will provide enhanced social security benefits to employees, thus securing their life after retirement- through their current salaries will reduce marginally.

How does the new wage code affect the taxes paid by employees?

Experts note that due to a salary restructure, the tax liability of employees who are earning a greater salary will likely increase. Why? As the tax capping options will be limited to only 50% of the CTC. However, an additional tax burden is not expected for employees belonging to the low and medium salary bracket.

How does the new wage code impact the business community?

Consistency in tech definition of wages

The current labour laws state at least 12 definitions for ‘wages’. The introduction of the new codes has allowed for a unified definition of the term ‘wages’ and therefore it is expected to reduce the confusion surrounding what should be included under ‘wages’.

‘Inclusion’ and ‘Exclusions’ are clearly explained and have to be understood by businesses

The code of wages specifically explains inclusions and exclusions under the definition of wages. All companies and firms will have to understand the definition, analyse the components of the employees’ CTC, and revisit the allocation of components in case they do not comply with the definition of wages and specified inclusions and exclusions.

Much wider coverage

Businesses don’t have to look out for what aspects of the law are applicable to their employees. Unlike the current labour laws which are restricted to workers or employees that draw a certain remuneration, the new wage code has much wider coverage.

The new wage code Act 2022 has a new age working model and apply to all employees. The new code gives protection and legal remedies to 21st-century employees and hence the code seems to be very forward-looking and inclusive.

Faster F&F Settlement

The New wage code states that wages payable to an employee should be paid within two days of removal, dismissal, resignation, or retrenchment. “Businesses should note this and should speed up their internal processes to ensure that dues are settled in the prescribed time”, says Siddharth Surana, Business Strategy and Transformation Advisor, RSM India.

What impact will the new wage code have on international organisations employing in India?

The wage code applies to every employee in India regardless of their employer, so international businesses will see an impact on the salaries and employment practices. It also creates additional legislation that will have a knock-on effect for international payroll, with training and roll-out of the new code best practice for HR and payroll teams.

For organisations entering the Indian labour market, or those with an existing presence, now could be a good time to partner with an international payroll specialist in India. As well as ensuring the new wage code is adhered to and the systems in place are compliant, local experts will help to guide decisions when it comes to potentially increasing salaries to mitigate the decrease in base salary, or the implementation of supporting benefits and their taxation implications.

Either way, the new code will require additional attention to ensure teams are paid accurately and to avoid associated fines for incorrect calculations that are not aligned to the wage code.

The results of new wage code implementation in 2022

The most direct effect of the new wage code getting implemented in 2022 will be the change in salary slips. A plethora of significant modifications in the salary structure of the private working class can now be seen.

Although workers are effectively contributing more towards a secure future, They’ll take a lower amount of money home. And with a global cost of living crisis, shortages of energy and raw materials and the knock-on effect of Covid-19, the timing of the wage code increase will certainly have an impact on consumer confidence and household spending in India.

Also, the taxes payable are bound to go up after the 2022 wage code change. Why? As the basic salary sees a spike, taxes will also increase in line. However, a part of HRA and Bonus are non-taxable as per the existing rules.

The non-taxable part will reduce significantly under the new code and will range between 20-25%. Due to increased basic salary, the taxable part of HRA will also rise, and hence tax on HRA will also rise. However, these changes affect those with high income while the people with low income will not witness any significant rise in their taxable income.


The State Governments have to bring in their own rules and guidelines to implement the New wage code 2022. The compliance cost might be there, and a lot of paperwork will also need to be done, but the general option is that the new code is employee positive.

TopSource Worldwide provides a wide range of employer services that will help you to pay consistently, accurately, and promptly. We also aid employers in ensuring that their payments are compliant with active regulations. If you are an employer and are unsure about how the new wage code is to be implemented, contact us today!


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Nena Petrovic
India Payroll Director
Nena Petrovic is the Client Advisor Team Leader at TopSource Worldwide, a leading Global Expansion services provider. She oversees and guides a team of client advisors, who communicate and collaborate with clients effectively. She is responsible for ensuring the accurate and timely processing of client invoices and payroll, as well as developing strategies and maintaining a client-centric approach.

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