Until recently, conversations for salaried taxpayers centred mainly on outgo and choosing between the new and the old regime. However, with the notification on the implementation of the New Labour Codes, effective Nov 21, 2025, benefits such as gratuity and Provident Fund (PF) are now becoming central to these conversations.
A key change is the revised definition of ‘wages’, which forms the base for statutory benefits. Wages include all remuneration such as basic pay, dearness allowance and retaining allowance, after excluding specified components like HRA, conveyance allowance, employer’s contribution to PF, housing and utilities, medical attendance and other specified components. These exclusions are capped at 50% of total remuneration, with any excess added back to wages, potentially increasing gratuity under the Code on Social Security, 2020.
It does not lead to higher PF deductions...
Despite the expanded wage definition, PF contributions are unlikely to increase for most employees. That’s because:
- PF continues to be governed by the Employees’ Provident Funds Act, which has not yet been repealed
- Contributions can still be calculated on the statutory wage ceiling of 15,000 per month
- Even where basic salary exceeds the ceiling, employers may continue contributing 12% of basic pay, even if ‘wages’ under the new labour codes are higher
Under the earlier law, gratuity was mandated to be calculated only on ‘basic salary’ upon an employee attaining five years of continuous service, unless better terms were offered. Companies paid gratuity on basic salary (which may have been lower than 50% of total remuneration). Now, under the new rules, since wages must be at least 50% of total remuneration, the base for gratuity rises.
Formula is the same…
Gratuity = (15 / 26) × Last drawn monthly wages × Years of service
What changes is last drawn monthly wages — it’s now higher.
