India’s New Labour Codes mark a significant shift in the country’s employment and compliance landscape. With the introduction of a uniform definition of wages, revised gratuity rules, and streamlined statutory compliance, these Codes aim to simplify labour laws while ensuring greater transparency and worker protection. Here’s a simplified breakdown of what businesses and employees need to understand.
Transition Period: Which Rules Apply?
During the transition phase, existing labour rules will continue to apply until new rules are formally notified. This continuity is ensured under the General Clauses Act, 1897, provided the old provisions align with the new Codes .
Uniform Definition of Wages
One of the most impactful reforms is the introduction of a single definition of “wages” across all four Labour Codes. Wages primarily include:
- Basic Pay
- Dearness Allowance (DA)
- Retaining Allowance (if any)
If allowances exceed 50% of total remuneration, the excess amount is added back to wages for statutory calculations. This directly impacts PF, ESI, gratuity, and other compliance costs .
The 50% Allowance Rule Explained
The Labour Codes restrict excessive structuring of salaries through allowances. Any allowance (excluding gratuity and retrenchment compensation) beyond the 50% threshold is treated as wages, increasing statutory liability. Performance incentives, ESOPs, and reimbursements remain excluded .
Gratuity: What’s New?
Gratuity provisions under the new Codes come into force from 21 November 2025 and apply prospectively. Gratuity becomes payable on:
- Resignation
- Retirement
- Termination
- Death or disablement
- Expiry of fixed-term contracts
The maximum gratuity limit remains ₹20 lakh, and employees are entitled to better terms if specified in existing agreements or awards .
Special Provisions and Worker Coverage
- Completion of five years is not mandatory in cases like death, disablement, or fixed-term contract expiry.
- Supervisory employees earning more than ₹18,000 per month are excluded from the definition of “worker” under the OSH & WC Code.
- Core and non-core activities are clearly defined, allowing contract labour in specific core activities under defined conditions .
ESI and Journey Allowance
Until final rules are notified, ESI coverage follows the new wage definition effective from 21 November 2025. Interstate Migrant Workers are entitled to annual journey allowance from their native place to the workplace .
The New Labour Codes aim to balance ease of doing business with stronger employee welfare. For employers, this means revisiting salary structures and compliance strategies. For employees, it brings clarity, consistency, and long-term social security benefits. Early preparation and awareness will be key to smooth implementation.