What India’s New Labour Codes Mean for Global Benefits & Payroll Teams

India’s new Labour Codes consolidate 29 laws into four. On paper, the intent is clarity and modernisation. In practice, they force employers to rethink how pay is structured, reported and funded.

The headline change is simple: the definition of “wages” must represent at least 50% of total fixed pay.

The implications are not.

1. The 50% Rule Changes Pay Architecture

Under the new Code on Wages, basic salary (plus dearness allowance and retaining allowance, where applicable) must constitute at least 50% of fixed remuneration.

For many multinational employers, this is not a rounding adjustment. Historically, wage components in India have often sat between 25% and 50% of total fixed pay.

If your structure is below 50%, you must rebalance it.

That redesign has mechanical consequences:

• EPF contributions are calculated as 12% of wages (employer and employee).
• Gratuity is calculated as 15 days’ wages per year of service.
• Leave encashment calculations may also rise where linked to wages

A structural change in wage composition therefore flows directly into statutory benefit costs.

2. EPF: Limited for Some, Material for Others

For employers who cap EPF at INR 15,000 per month, cost impact may be modest.

For employers who contribute on uncapped wages — which many multinationals do — increasing the wage component increases both employer and employee contributions.

That has two consequences:

• Employer cost increases.
• Employee take-home pay reduces.

Even where the net financial exposure is manageable, the employee relations impact requires planning.

In addition, scope widens to include fixed-term and contract workers in certain cases.

This is a structural broadening of coverage, not a minor technical revision.

3. Gratuity: The Real Financial Exposure

Gratuity is where this becomes more serious.

Gratuity is a defined benefit arrangement. It accrues over time. It is linked directly to wages.

If wages increase structurally, two things happen:

• Future service accrual increases.
• Past service liability may need to be remeasured.

Under IAS 19, past service impact may require immediate recognition.

For organisations with large India workforces and historically low wage ratios, this is not marginal. It can be material.

In addition, some states already require gratuity funding, and there is reference in the legislation to potential insurance requirements. If unfunded book reserves must be backed with assets, the cash impact becomes more immediate.

However as Ian Hinton, Vice President Global Consulting, from Fidelity raises, this is still to be confirmed:

“They have stated in the regulations that there will need to be some mandatory insurance, but what they haven’t said is what that is.”

This is where finance, HR and payroll must align.

4. Timeline Uncertainty Increases Governance Risk

The legislation is effective from 21 November 2025, but implementation detail and transition timelines remain unclear.

There has been speculation about 1 April 2026, aligning with the Indian tax year, but this is not confirmed.

Uncertainty does not reduce risk. It increases it.

If implementation crystallises with limited lead time, employers who have not modelled scenarios will be reacting under pressure.

5. What Employers Should Be Doing Now

Uncertainty around timing does not reduce the need for preparation. If anything, it increases it. The organisations most exposed are those that wait for final implementation detail before modelling their position.

As Ian put it during the session:

“It’s key that all companies are doing work in the background so that they’re ready.”

In practice, this means:

Diagnose

• Audit salary structures.
• Calculate current wage-to-gross ratios.
• Identify populations affected (including fixed-term and contract workers).
• Model accounting exposure.
  
  

Design

• Evaluate salary restructuring options.
• Model EPF, gratuity and leave encashment cost under different ratios.
• Assess employee take-home pay impact.
  
  

Prepare to implement

• Test payroll systems rigorously.
• Update contracts and policies.
• Develop a clear employee communication strategy.
• Ensure reporting and audit trails are robust.
  
  

The critical point is coordination. Compensation, Benefits, Payroll, Finance and Legal cannot treat this as separate workstreams.

6. Why This Exposes Infrastructure Gaps

This reform tests something deeper than compliance capability.

It tests whether you can:

• Model liability changes at scale.
• Simulate multiple redesign scenarios.
• Surface take-home pay impact before rollout.
• Maintain clear audit trails.
• Communicate personalised impact at employee level.

Running this through static spreadsheets may be workable for a handful of employees. It does not scale across thousands.

The reform is effectively asking a question: can your systems absorb structural change without creating operational fragility?

That is an infrastructure question.

Final Thought

India’s Labour Codes aim to modernise and standardise labour regulation. For employers, the strategic issue is not whether the reform is positive. It is whether internal systems are ready for it.

The most practical way to assess that readiness is to model the impact — live, against your own data.

If you would like to see how wage restructuring, gratuity remeasurement and employee-level simulations can be tested in a controlled environment, we are happy to show you.

Proof matters more than promises.

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Want to learn more? Watch the full episode here.

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