Provident Fund  and Gratuity Contributions Set to Rise Under New Labour Code: Impact on Take-Home Pay

Under the implementation of the New Labour Code, employees in India may see an increase in provident fund (PF) and gratuity contributions, potentially affecting take-home salaries. As per the Wages Code, an employee’s basic salary must constitute at least 50% of their total cost-to-company (CTC), or a higher percentage as specified by the government. This provision secures that retirement benefits are calculated fairly and consistently, preventing the practice of reducing basic pay while inflating allowances to lower statutory contributions.

Why Basic Pay is Important

Both PF and gratuity contributions are directly linked to basic salary. PF is calculated at 12% of basic pay, while gratuity is based on the final basic salary and years of service.

Under the new rules, a higher basic salary will lead to larger deductions from both employers and employees. While this enhances retirement savings, experts warn that it may reduce net take-home pay if allowances are restructured downward within the same CTC.

“The new labour codes unify the definition of ‘wages’ across statutes, ensuring better retirement security through higher gratuity and provident fund, but could lead to a dip in take-home pay if employers adjust allowances to balance costs,” said Suchita Dutta, executive director of the Indian Staffing Federation.

Uniform Wage Definition Across Labour Laws

The new Labour Codes introduce a standardised definition of wages comprising basic pay, dearness allowance, and retaining allowance. To ensure consistency in calculating gratuity, pension, and other social security benefits, 50% of the total remuneration—or a higher percentage if notified—is added back wherever allowances exceed this limit. In the wage calculation, components such as HRA and conveyance allowances are excluded.

Anjali Malhotra of Nangia Group said the uniformity across labour codes ensures consistent PF and gratuity calculations. Puneet Gupta of EY India added that the reform could raise gratuity payments, boosting employees’ long-term financial security.

Conclusion

Employees may see higher retirement contributions and better social security, but their take-home pay could temporarily decrease. Companies might need to adjust allowances within the same CTC to cover increased PF and gratuity. Experts say this is a needed step toward fairer and more balanced compensation.