India's New Labour Codes 2026: Key Changes in Payroll and Statutory Compliance

The four Labour Codes took effect on 21 November 2025 and replaced 29 central labour laws: the Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020 and the Occupational Safety, Health and Working Conditions (OSH&WC) Code, 2020. Almost a year on, payroll teams need to know what has changed and what is still pending. This article covers both, plus a working checklist.

Where implementation stands (October 2026)

• Codes: in force nationwide since 21 November 2025, under MoLE gazette notifications.
• Central Rules: notified on 8 May 2026, as confirmed in the Ministry's Lok Sabha reply of 20 July 2026.
• State Rules: labour is a Concurrent List subject, so each State/UT has to frame its own rules. The Ministry says most States have finalised or pre-published theirs. Press reports and public trackers from September–October 2026, however, suggest that only about ten or eleven States/UTs have final rules under even one Code. Large industrial States such as Maharashtra, Karnataka and Tamil Nadu are reported to still be at the draft stage. Check the State gazette before relying on any position.
• Transition: provisions that need no rules already apply. Rules and schemes under the repealed laws continue where they are not inconsistent with the Codes.

In practice, the definitions in the Codes, especially "wages", apply now. Procedural details such as forms, overtime limits and registers depend on your appropriate government and on whether its rules are final.

1. The uniform definition of "wages" and the 50% rule

Section 2(y) of the Code on Wages and Section 2(88) of the Code on Social Security define wages as all remuneration, including basic pay, DA and retaining allowance. Certain items are excluded: statutory bonus, employer PF contributions, conveyance, HRA, overtime, commission, gratuity, retrenchment compensation and a few others. The key proviso says that if the excluded items in clauses (a) to (i) exceed 50% of total remuneration, the excess is added back to wages.

The Ministry's FAQs (as on 16 March 2026) clarify the following:

• Overtime counts in the 50% computation.
• Employer PF contributions and statutory bonus are part of total remuneration. Gratuity and ESI are not.
• Annual performance incentives are not wages.
• The definition applies from 21 November 2025.

Illustration

A general "special allowance" is not on the exclusion list, so it is usually already wages. The real exposure lies in structures heavy on HRA, conveyance, commission or overtime. The illustration leaves out employer PF to keep it simple. Because the FAQs bring PF into the computation, live payroll needs an iterative calculation.

2. Impact on PF and ESI

Provident Fund

PF is computed on wages as defined in the Code, so any add-back raises the PF base. Separately, the EPFO wage ceiling for mandatory coverage rose from ₹15,000 to ₹25,000 a month with effect from 17 September 2026 (MoLE/PIB, 16 September 2026). EPFO's FAQs on the revision clarify that:

• Employees earning up to ₹25,000 must be enrolled in EPF, EPS and EDLI by the employer. Members earlier excluded from EPS whose wages are below ₹25,000 come into EPS.
• September 2026 wages are apportioned: ₹15,000 ceiling for 1–16 September and ₹25,000 for 17–30 September. Both go in a single ECR due by 15 October 2026. If the additional employee share could not be deducted in September, it may be recovered in the October payroll, but the full amount must still be remitted on time.
• CTC is not a statutory concept. The employer's share cannot be passed on to the employee by relabelling it as part of CTC.

ESI

According to the Ministry's FAQs, the Code definition of wages has applied to ESI since 21 November 2025, and the ₹21,000 threshold continues. Coverage is therefore tested on Code wages, not gross pay. ESIC field communications expect coverage to extend to employees who were previously excluded. For example, someone on ₹28,000 gross whose Code wages are ₹20,000 may now be coverable. Confirm borderline cases with your ESIC branch. ESIC coverage is now pan-India, and mandatory even for a single employee in a hazardous process.

The 50% test, the PF and ESI ceilings and the State professional tax slabs now interact in every pay cycle. Most employers will be safer encoding these rules in their payroll and compliance software than running them in spreadsheets, with PF, ESI, PT and TDS calculated automatically and a monthly audit trail.

3. Gratuity: bigger base, shorter clock for FTEs

• Base: for exits on or after 21 November 2025, the Ministry's FAQs say gratuity is paid on wages last drawn as defined in the Code, for the entire period of service.
• Fixed-term employees: FTEs become eligible after one year under the contract, and an 11-month engagement does not qualify. FTE status covers direct hires only.
• Others: contract labour receives gratuity from the contractor after five years. Regular employees keep the five-year condition, with the usual exceptions for death and disablement.

Take 10 years' service at 15/26 of monthly wages per year. On ₹30,000 of Code wages, gratuity is about ₹1,73,077, against about ₹86,538 on a ₹15,000 basic. Under Ind AS 19/AS 15, an increase in obligation caused by a change in law is generally recognised as past service cost, so refresh your actuarial valuations.

4. Working hours, overtime, leave and payment timelines

• Hours and overtime: the limits are 8 hours a day and 48 hours a week. Overtime is paid at twice the normal rate at the end of the wage period. Overtime caps are now set by the appropriate government, in place of the old uniform 75 hours a quarter. According to the FAQs, overtime eligibility applies to employees whose minimum wage is fixed under the Code, so document your position on supervisory staff.
• Leave: annual leave is earned after 180 days of work in a calendar year (earlier 240). Up to 30 days can be carried forward. A more favourable State law prevails.
• Payment deadlines: monthly wages must be paid within 7 days of the following month. Dues on resignation or termination must be paid within 2 working days. Timely-payment and deduction rules, earlier limited to employees earning up to ₹24,000, now cover everyone. Full-and-final settlement processes must change.

5. Registers, returns and records

• Code on Wages (Central) Rules, 2026: an employee register, a wage register (covering overtime, advances, fines and deductions) and an attendance register-cum-muster roll. These may be kept electronically and must be retained for five years. Wage slips must be issued on or before the day wages are paid.
• OSH&WC (Central) Rules, 2026: a single electronic registration on the Shram Suvidha portal and a calendar-year annual return. Appointment letters are mandatory for all employees.
• State-sphere establishments: follow final State rules where they exist. Otherwise, legacy registers and returns continue where consistent with the Codes.
• Enforcement: first-time, fine-only offences are compoundable at 50% of the maximum fine.

Frequently asked questions

1. Do the Codes apply if my State has not notified final rules?

Yes. The Codes have been in force nationwide since 21 November 2025. Provisions that need no rules apply now, and existing rules continue where not inconsistent.

2. Must basic pay be 50% of CTC?

Not exactly. The test compares excluded components with total remuneration as the Code defines it. Many allowances are already wages. Raising basic pay is one way to comply, but it is not mandated.

3. Is gratuity on the new definition only for service after 21 November 2025?

According to the Ministry's FAQs, for exits on or after that date gratuity is calculated on Code wages last drawn, for the full period of service.

4. Which PF ceiling applies for September 2026?

Both. Contributions are apportioned: ₹15,000 up to 16 September and ₹25,000 from 17 September, reported in one ECR.

Disclaimer: This article is general information based on public material available as of 8 October 2026 and is not legal advice. State rules vary and are evolving, so verify the current position before acting.

The author works with TankhaPay, a global HRMS and AI recruitment platform from Akal Information Systems Ltd. In India, TankhaPay also provides statutory compliance, Employer of Record (EOR) and managed HR services. He writes on payroll, labour law and compliance operations for finance and HR teams.