Code on Wages 2026: 50% Wage Rule, PF, Gratuity, F&F & Salary Impact

You all are aware of the latest changes under the Code on Wages, and this is going to be a major change for HR and Payroll professionals.

The impact is not limited to salary structure. It can affect PF, gratuity, leave encashment, take-home salary, payroll calculations, compliance, and even the way companies structure employee compensation.

The Ministry of Labour has also published the Code on Wages (Central) Rules, 2026, so this is a topic that every HR and Payroll professional needs to understand clearly.

So, in this article, we are going to cover everything you need to know about the Code on Wages.

We will understand what has changed, how the 50% wage rule works, what will happen to Basic Salary, how PF and gratuity can be impacted, what happens to employees’ take-home salary, and most importantly, what HR and Payroll teams need to do differently. So, let’s understand these changes step by step with practical examples.

Let us understand the first and one of the most important changes — the 50% Wage Rule

Under the new wage framework, the salary structure has to be reviewed so that the components forming part of “wages” meet the required 50% threshold of the applicable remuneration.

In simple terms, if an employee’s total remuneration is ₹50,000 per month, the wage component considered under the Code cannot be kept artificially low by putting a large portion of the salary into various allowances.

For example, if the Basic Salary plus DA is only ₹20,000 against total remuneration of ₹50,000, the wage calculation may need to be adjusted to meet the applicable 50% requirement.

This change is extremely important because the wage figure is used for calculating several statutory benefits and contributions.

So, this one change can have a direct impact on PF, gratuity, leave encashment and the employee’s take-home salary.

Now, let’s understand this with a practical salary example and see exactly how the salary structure can change before and after applying the 50% rule.

Practical Example of the 50% Wage Rule

Let us understand this with a simple example. Suppose an employee’s Total Salary is ₹50,000 per month.

Before applying the 50% wage rule, the salary structure may look like this:

• Basic Salary = ₹20,000
• HRA = ₹10,000
• Conveyance Allowance = ₹5,000
• Special Allowance = ₹15,000
• Total Salary = ₹50,000

Here, the Basic Salary is only ₹20,000, which is 40% of the total salary. Under the new wage framework, the wage component needs to be at least 50% of the applicable remuneration after considering the statutory definition and exclusions.

So, for a simple illustration, if ₹50,000 is the relevant remuneration, the 50% threshold would be:₹50,000 × 50% = ₹25,000

Therefore, the wage component would need to be aligned to approximately ₹25,000 rather than ₹20,000. For example, the revised structure could be:

• Basic Salary = ₹25,000
• HRA = ₹10,000
• Conveyance Allowance = ₹5,000
• Special Allowance = ₹10,000
• Total Salary = ₹50,000

So, the important point is that the employee’s total salary remains ₹50,000, but the salary components are restructured.

And this restructuring can increase the amount considered for certain statutory calculations, which can have an impact on PF, gratuity, leave encashment and ultimately the employee’s take-home salary.

But remember, this is a simplified example. The actual calculation under the Code depends on which components are included in “wages” and which exclusions apply.

Impact on PF, Gratuity and Leave Encashment

Now the most important question is — what will be the impact of this 50% wage rule on employees?

Let us continue with our previous example. Suppose an employee’s total remuneration is ₹50,000 per month.Earlier, the Basic Salary was ₹20,000.After applying the wage calculation, suppose the wage component increases to ₹25,000.

Now let’s see the impact one by one.

1. Impact on PF

PF is generally linked to the PF wage, subject to the applicable EPF rules and contribution ceiling.

If the employee is contributing PF on the higher wage, an increase in the PF wage can increase the employee’s and employer’s PF contribution. Example –

• Earlier PF wage = ₹20,000
• Employee PF at 12% = ₹2,400
• Revised PF wage = ₹25,000
• Employee PF at 12% = ₹3,000

So, the employee’s PF deduction can increase by ₹600 per month. This means the employee may see a reduction in monthly take-home salary, while the employee’s retirement savings increase.

2. Impact on Gratuity

The second major impact is on Gratuity. Gratuity is calculated using the wages applicable for gratuity purposes. If the wage base increases, the gratuity liability can also increase.

For example, if the wage used for gratuity increases from ₹20,000 to ₹25,000, the gratuity amount for the same period of service will increase accordingly.

So, this can mean a higher future gratuity benefit for the employee and a higher gratuity liability/provision for the employer.

The Ministry of Labour has clarified that gratuity under the Code applies from 21 November 2025.

3. Impact on Leave Encashment

The third impact is Leave Encashment. If the applicable wage used for leave encashment increases, the value of the employee’s accumulated leave can also increase.

For example, suppose an employee has 30 days of eligible leave. If the applicable monthly wage was ₹20,000 earlier, the leave value would be approximately:

₹20,000 ÷ 30 × 30 = ₹20,000

If the applicable wage becomes ₹25,000:

₹25,000 ÷ 30 × 30 = ₹25,000

So, in this simplified example, the employee could receive ₹5,000 more for 30 days of leave encashment. However, the exact leave-encashment calculation depends on the applicable law, rules and the wage components considered by the employer.

Full & Final Settlement – 2 Working Days

Another major change that HR and Payroll professionals need to understand is related to Full & Final Settlement (F&F).

Under Section 17(2) of the Code on Wages, when an employee is removed, dismissed, retrenched or resigns, the wages payable to the employee are required to be paid within two working days of the employee’s removal, dismissal, retrenchment or resignation.

This is a significant change from the traditional F&F process followed by many organisations, where settlement may take several weeks depending on internal processes.

What is included in Full & Final Settlement?

A typical F&F settlement may include:

• Salary payable up to the last working day
• Leave encashment, wherever applicable
• Gratuity, if eligible
• Bonus or incentive payable, where applicable
• Reimbursement of eligible expenses
• Other amounts payable to the employee

At the same time, authorised recoveries may also need to be adjusted, such as:

• Notice-period recovery
• Employee advance
• Salary advance
• Loan recovery
• Other authorised deductions

Suppose an employee resigns on 10 August and 10 August is the employee’s effective date of resignation/cessation.

Under Section 17(2), the wages payable on account of that cessation are required to be paid within two working days, subject to the statutory provisions and applicable rules.

Therefore, Payroll cannot simply follow an internal process of completing F&F after 15, 30 or 45 days if that would delay wages that are required to be paid within the statutory timeline.

The two-working-day requirement specifically relates to wages payable under Section 17(2). It should not automatically be interpreted as meaning that every component of an employee’s complete F&F package must always be settled within exactly two working days.

Other components, such as gratuity or amounts governed by other laws, may have their own applicable requirements and timelines.

So HR and Payroll teams should clearly distinguish between:

Wages payable under the Code on Wages

and

Other statutory or contractual F&F components.

This distinction is extremely important when designing the company’s F&F process.