India’s Wage Code, Six Months In: What HR and Finance Leaders Need to Know

Summary:

• Obligations under India’s labour codes run from 21 November 2025, when the substantive law came into force, not from the date a company updates its paperwork.
• The Central Government notified its final rules on 8 May 2026, but states still have to notify their own rules before the procedural side is fully enforced.
• The 50% wage rule works by exclusion: everything outside the listed allowances counts as wages, which drives gratuity, PF and ESI.
• Run labour code compliance as a quarterly or six-monthly review, not a one-off exercise.

Six months on from the new labour codes coming into force, most organisations are still finding their footing. That’s worth saying plainly, because a lot of the guidance circulating treats this as a settled matter. It isn’t.

The following draws on a recent discussion among labour law and payroll specialists, including Sandeep Nagarkar, a labour law consultant working with TopSource, Rohit Tikhe, Partner at Corpeagle Convisors, and Sandeep Patil, Head of Global Payroll at TopSource.

The four labour codes were first proposed back in 2002 and went through six rounds of consultation before the substantive law came into force on 21 November 2025. The Central Government issued its final rules on 8 May 2026. But labour sits on the concurrent list in India’s constitution, so states also have to notify their own rules before the procedural side is fully enforced. Maharashtra, for example, has only issued draft rules so far.

That gap between the substantive law being live and the procedural rules still being finalised has led a lot of companies to assume they can wait. That’s a mistake. Obligations and liabilities are calculated from 21 November 2025, not from whenever a company gets around to updating its paperwork. Gratuity provisioning, statutory payouts, balance sheet treatment, all of it needs to reflect that date. The government has already started issuing notices to companies that haven’t shown progress.

Companies that went live in January or April, aligning with a new calendar or fiscal year, are in a reasonably defensible position. Companies still holding out for complete clarity before acting are not, and should expect scrutiny. For the full list of what changed, see our guide to India’s new labour law reforms.

The most persistent point of confusion is the “50% wage” rule, which requires at least half of an employee’s total compensation to qualify as wages under the new definition. That figure then drives gratuity, provident fund and other statutory calculations.

Most companies assumed this meant 50% basic salary. It doesn’t. The rule actually works the other way round. The law sets out a specific list of exclusions, certain allowances and benefits, and everything that falls outside that list counts toward the wage definition. That includes components like special allowances or furnishing perks that many companies had deliberately structured outside of basic salary for years. Get the classification wrong and it flows straight through into under- or over-provisioning on gratuity, PF and ESI.

There’s a real financial decision hiding in here too. Companies now need to work out whether the increased cost lands on the business, through a higher CTC, or on the employee, through lower take-home pay. It’s worth being honest that a lot of finance teams have been managing gratuity provisioning for years in a way that simply won’t hold up under the new rules. Our explainer on the new wage code and payroll processing walks through the salary structure changes in more detail.

If your organisation is still getting this right, here’s where to focus:

1. Check the calculation with your payroll provider directly. Confirm the 50% inclusion and exclusion split is correct, and that it’s checked every pay cycle, not just at year end. Problems tend to surface at audit, by which point the exposure has already compounded across months of payroll.
2. Confirm all new registrations are in place. PAN linked social security numbers now replace the old separate PF and ESI numbers.
3. Check returns are filed on both fronts. Under the labour code itself, and under state level laws that haven’t changed, such as the Shop Act, state labour welfare fund and professional tax.
4. Keep the statutory registers current. There are roughly ten still required, covering salary, leave, accidents and similar records.
5. Confirm mandatory workplace displays are up to date. Minimum wage and working hours notices in particular.
6. Have a process for intimating the Labour Department. Specified events like accidents, strikes or disease outbreaks carry reporting obligations.
7. Review union settlement agreements. One of the first disputes under the new code arose because a company changed its compensation structure without informing and renegotiating with a union first.
8. Treat full and final settlements carefully. They’re legally required within two working days of an employee’s last working day, but that clock starts once notice period obligations and asset returns are settled, not the moment resignation is submitted. A documented process for chasing outstanding assets before releasing final dues isn’t automatically non-compliant, as long as it’s applied consistently.

Run this as a quarterly or six monthly review, ideally folded into internal audit, rather than a one-off exercise. State rules are still being finalised and central rules keep evolving. The EPS 2026 scheme is a recent example. It largely mirrors existing PF rules but now allows employers to make voluntary matching contributions above the standard ceiling, and further changes of this kind should be expected.

The wage code has changed more than compliance paperwork. It’s tied CTC structuring, tax regime choices and gratuity funding into a single set of decisions in a way they weren’t before. Six months in, the organisations in the strongest position aren’t the ones who moved fastest. They’re the ones who built a process for staying current, because this law is still being written.