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The Indian government has published draft rules for new labour codes following their rollout in November 2025, marking a significant transformation in how employee benefits and wages will be calculated across the country. Public feedback has been invited until February 14, 2026, with a January 30, 2026 deadline specifically for Industrial Relations Rules.
These comprehensive reforms rationalize 29 central labour laws into four major codes, fundamentally changing gratuity calculations, overtime payments, and workplace benefits for millions of employees and organizations.
Understanding the New Wage Definition
The biggest clarification emerging from draft rules centers on wage definition—critical because this determines gratuity amounts employees receive when leaving their jobs.
What Counts as ‘Wages’ Under New Rules
Wages now include:
- Basic pay
- Dearness allowance
- Retaining allowance (if any)
The 50% Rule Explained:
If payments and allowances (excluding basic pay, dearness allowance, and retaining allowance) exceed 50% of total remuneration, the excess amount gets added back to wages for statutory calculations.
Components Excluded from Wages
The following do NOT form part of wages:
- Reimbursement of medical expenses
- Stock option benefits or cash equivalent of stock awards
- Crèche allowance
- Telephone and internet reimbursement
- Value of meal vouchers
- Performance-linked annual payments
- Leave encashment
Gratuity Calculation Under New Labour Codes
How the 50% Wage Rule Works: Practical Example
| Component | Amount (Monthly) |
| Total Remuneration | ₹85,000 |
| Basic Pay + Dearness Allowance | ₹25,000 |
| Allowances | ₹45,000 |
| Other Components (Gratuity, retrenchment compensation) | ₹15,000 |
| Total Allowance Paid | ₹60,000 |
| Maximum Allowance Allowed (50% of total) | ₹42,500 |
| Excess Allowance | ₹2,500 |
| Revised Wages for Statutory Compliance | ₹27,500 |
Calculation Breakdown:
Total remuneration: ₹85,000 Basic Pay + DA: ₹25,000 Allowances paid: ₹45,000
Maximum allowance allowed (50% of ₹85,000): ₹42,500 Excess allowance: ₹45,000 – ₹42,500 = ₹2,500
This excess ₹2,500 gets added back to basic wages (₹25,000), creating revised statutory wages of ₹27,500 for all compliance calculations including gratuity, provident fund, and other benefits.
When Is Gratuity Payable?
Gratuity becomes payable in these situations:
- On termination
- On superannuation (retirement due to age)
- On resignation
- On death or disablement due to accident or disease
- On expiration of fixed-term employment contracts
- On any other event notified by Central Government
Gratuity Calculation Formula
For every completed year of service (or part thereof exceeding six months):
15 days’ wages per year based on last drawn wages
Maximum gratuity cap: ₹20 lakh (as currently notified by Central Government)
Example: If an employee with revised statutory wages of ₹27,500 per month completes 10 years of service:
Gratuity = (₹27,500 × 15 × 10) ÷ 26 = ₹1,58,654
Major Changes: Who Gets Affected and How
| Aspect | Old Rule | New Rule (2026) | Who’s Affected | Impact |
| Wage Definition | Could be less than 50% of remuneration | Minimum 50% must be basic + DA + retaining allowance | All employees | Higher contributions, potentially higher gratuity and PF |
| Gratuity Base | Calculated on last drawn wages | Must be calculated on wages ≥50% of remuneration | All employees | Higher gratuity payout where wage base increases |
| Fixed-term Employee Gratuity | After 5 years continuous service | After completing 1 year of service | Contract/Fixed-term employees | Earlier access to benefits |
| Permanent Employee Gratuity | After 5 years continuous service | No change—still 5 years | Permanent employees | Status quo maintained |
Key Employee Benefits Under New Rules
1. Weekly Rest Days
Employees are entitled to:
- At least one ‘rest day’ per week
- No work requirement on rest days unless substituted
- Substitution must be within the same week (immediately before or after)
- Maximum 10 consecutive working days without a full rest day
2. Overtime Payment Rules
Workers qualify for overtime when:
- Working more than 8 hours in any day (for daily wage workers)
- Working more than 48 hours in any week
Overtime rate: Twice the regular wage rate for extra hours
Payment timeline: At the end of each wage period
3. Women Working After 7 PM
Mandatory provisions for night shifts (after 7 PM, before 6 AM):
- Written consent from women employees required
- Pick-and-drop transport facility mandatory
- Enhanced security arrangements
- Facility access considerations
4. Medical Examination Requirements
Annual medical examinations required for:
- Factory workers
- Dock workers
- Mine workers
- Building and construction workers
Conditions:
- Free of cost for employees
- Within 120 days from start of calendar year
- For employees who have completed 40 years of age
- Available through ESIC facilities
5. Crèche Allowance
Employers must provide either:
- On-site crèche facility, OR
- Crèche allowance of minimum ₹500 per month per child
This can be negotiated through union agreements or with majority employee consent.
6. Journey Allowance for Inter-State Migrant Workers
Employers must pay journey allowance once in 12 months covering:
- To-and-fro journey from workplace to home location
- Applicable specifically for inter-state migrant workers
Compliance Requirements for Organizations
Appointment Letter Rules
Timeline: All employees must receive appointment letters within 3 months of new labour rules coming into force.
Worker Re-skilling Fund
When retrenchment occurs:
- Employer transfers amount equivalent to 15 days’ last drawn wages
- Transfer within 10 days of retrenchment
- Maintained in account by prescribed labour commissioner
- Electronically transferred to retrenched worker within 45 days
- Enables worker to utilize funds for re-skilling
Contract Labour Engagement Rules
Key restrictions and requirements:
- Employment of contract labour in core activities not allowed (subject to exceptions)
- Joint Secretary, Ministry of Labour & Employment empowered to classify core vs. non-core activities
- Principal employer must pay minimum bonus if contractor fails
- Annual increment of at least 2% of wages required for regularly employed contractor workers
- Experience certificates must be issued on demand
Grievance Redressal Mechanism
For establishments employing 20+ workers:
- Mandatory grievance redressal committee
- Resolves disputes from individual grievances
- Separate mechanism required for contract labour
For establishments employing 500+ workers:
- Safety committee required
- Equal representation from employer and workers
- Maximum 20 members
Record Maintenance Requirements
Organizations must maintain:
- Employee register
- Attendance register-cum-muster roll
- Register of wages, overtime, advances, fines, and deductions
- Register of women employees
Preservation requirements:
- Original format for 5 calendar years
- Records in English and Hindi or language understood by majority
- Nomination obtained from employees for payment of dues in case of death
Annual Compliance
Unified annual returns must be filed each year covering all statutory requirements.
Financial Impact on Organizations
According to EY analysis, organizations should prepare for significant financial and operational changes:
Cost Implications
Increased expenses on account of:
- Enhanced gratuity payouts (due to revised wage definition)
- Higher leave encashment amounts
- Overtime payments (after 48 weekly hours)
- On-site crèche facilities or allowance payments
- Journey allowance for migrant workers
- Annual medical examinations
- Transport arrangements for women working night shifts
Compliance Framework Requirements
Organizations need to:
- Conduct comprehensive review across HR, finance, payroll, and legal functions
- Perform impact assessments on existing salary structures
- Revise policies to align with new framework
- Budget for 2% annual contractor worker increments
- Verify contractor compliance with minimum wages
- Implement robust internal controls
- Conduct periodic diagnostic reviews
Common Misconceptions Clarified
Myth 1: All Employees Get Gratuity After 1 Year
Reality: Only fixed-term and contract employees become eligible after 1 year. Permanent employees still require 5 years of continuous service.
Myth 2: All Allowances Are Part of Wages
Reality: Several components remain excluded—medical reimbursements, meal vouchers, telephone reimbursement, and performance-linked annual bonuses don’t form part of wages.
Myth 3: Current Salary Structures Will Remain Unchanged
Reality: Many organizations will need to restructure salary components to comply with the minimum 50% wage requirement, potentially increasing statutory contributions.
Implementation Timeline and Next Steps
Current Status
- Draft rules published (November 2025 rollout)
- Public feedback period open until February 14, 2026
- Industrial Relations Rules feedback deadline: January 30, 2026
For Organizations
Immediate actions required:
- Review current salary structures against 50% wage requirement
- Calculate financial impact of enhanced gratuity calculations
- Assess operational changes for night shifts, overtime, and crèche facilities
- Establish grievance redressal mechanisms
- Update HR policies and employment contracts
- Train payroll and finance teams on new calculations
- Set up compliance monitoring systems
For Employees
What you should do:
- Understand your revised wage structure
- Calculate potential gratuity benefits under new rules
- Verify appointment letter provisions
- Know your rights regarding overtime and rest days
- Understand grievance redressal procedures available
Conclusion
The new labour codes represent India’s most comprehensive labour law reform in decades, bringing clarity to wage definitions while enhancing employee protections and benefits. The revised gratuity calculation rules, particularly the 50% wage floor, will increase statutory benefits for many workers while requiring organizations to adapt their compensation structures and compliance frameworks.
Organizations must act swiftly to assess financial impacts, restructure policies, and implement robust compliance mechanisms. Employees, particularly those on fixed-term contracts, stand to benefit from earlier gratuity eligibility and clearer wage definitions that may increase their statutory benefits.
As the February 2026 feedback deadline approaches, both employers and employees should thoroughly understand these transformative changes that will shape India’s workplace landscape for years to come.
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