The Code on Wages 2019 consolidates four central labour laws — Minimum Wages Act, Payment of Wages Act, Payment of Bonus Act, and Equal Remuneration Act — into a single statute. Notified 21 November 2025, operational from FY 2026-27. The headline change foreign employers care about: the new statutory definition of 'wages' brings Basic-and-DA back to centre stage of payroll.
The 50%-of-CTC rule
Section 2(y) of the Code defines 'wages' as Basic + DA + retaining allowance. Anything excluded from wages (HRA, conveyance, bonus, statutory contributions, perks) is capped at 50% of total remuneration. In other words, Basic + DA must be at least 50% of CTC.
Foreign-employer salary structures historically run Basic at 30-40% of CTC to minimise PF, gratuity and bonus liability. That structuring is no longer legal post-CoW. Basic must hit 50% — which materially raises PF and gratuity bases.
What the 50% rule actually affects
- PF contributions — 12% of Basic. Higher Basic = higher PF, both employee and employer.
- Gratuity provisioning — 15/26 × Basic × years. Higher Basic = higher gratuity exposure.
- Statutory bonus under Payment of Bonus — 8.33-20% of Basic (subject to ceiling).
- Leave encashment — daily Basic × encashable days.
- Notice-period recovery in F&F — daily Basic × shortfall days.
- Overtime — typically 2× daily wages where applicable.
Restructure options
Two ways to comply, with different employee-side optics.
- Restructure within existing CTC — raise Basic from 40% to 50%, reduce other allowances proportionally. Net pay drops slightly because PF deduction (employee share) goes up. Employer cost also rises because employer PF and gratuity provisioning go up.
- Restructure with CTC bump — keep net pay constant by raising CTC by ~2-3% to absorb the higher PF and gratuity. Cleaner employee experience but higher employer cost.
Your consultant runs the restructure model
FastLegal's payroll consultant models both restructure paths (within CTC vs CTC bump) for every employee, surfaces the variance in net pay, and runs the formal salary-structure update through your subsidiary's payroll. Communication letters to employees are templated. The transition is invisible to the employee if you choose the CTC-bump path.
A compliant salary structure (sample)
Code-on-Wages-2019 compliant structure for a senior engineer at ₹50L CTC:
| Component | Annual (INR) | % of CTC | Wages under CoW? |
|---|---|---|---|
| Basic salary | 25,00,000 | 50% | Yes (the wage base) |
| HRA | 12,50,000 | 25% | No (allowance) |
| Special allowance | 5,00,000 | 10% | No |
| LTA | 2,08,000 | 4% | No |
| Telecom + food | 44,400 | 1% | No |
| Employer PF (12% of Basic) | 3,00,000 | 6% | — |
| Gratuity provision | 1,20,000 | 2% | — |
| Group health insurance | 78,000 | 2% | — |
| Total CTC | 50,00,000 | 100% |
Compliance deadline and enforcement
The Code is operational from FY 2026-27 (1 April 2026 onwards). Workspaces using FastLegal have the 50% floor enforced in the payroll engine automatically — if a salary structure violates the floor, the engine bumps Basic to 50% before payroll computes. Other providers handle this differently; verify your provider's stance.
Other Code on Wages changes worth knowing
- National floor wage to be notified by central government, below which no state minimum can fall.
- Equal remuneration extended beyond gender — to include all bases of discrimination.
- Inspector cum facilitator role — replaces the old inspector under multiple acts.
- Wage period — wages must be paid within 7 days of the end of the wage period (monthly being most common).
- Wage payment — mandatorily through bank transfer, cheque or electronic mode (no cash above threshold).
Frequently asked questions
Can we keep our existing salary structure if it pays employees well above minimum wage?+
No — the 50%-of-CTC floor applies regardless of absolute salary level. A senior engineer at ₹50L CTC with Basic at 35% still violates the floor and must be restructured.
Does the 50% floor apply to existing employees or only new hires?+
All employees, existing and new, from the operational date. Existing structures must be revised effective 1 April 2026.
What's the penalty for non-compliance?+
The wage definition under Section 2(y) is the trigger for PF, gratuity, bonus and many other calculations. Non-compliant structuring means under-deducted PF and under-provisioned gratuity, which trigger recovery + interest + damages on inspection.
Are there any exclusions from the 50% rule?+
Allowances paid by way of statutory obligation (employer PF contribution, statutory bonus when paid) are excluded from the calculation. Performance bonus, sales incentive and similar variable comp also typically fall outside 'wages' under Section 2(y).
Stop reading circulars. Start running clean payroll.
Every FastLegal plan ships with a dedicated payroll consultant — a real human who runs your PF, ESI, PT, TDS and Form 16 issuance, configured to your salary structure, your state, and your hiring plan. You sign off. We do the rest.