Explainer | Will the new labour codes reduce your take-home pay?

The Code on Social Security brings a wide set of reforms, extending social security to all workers, including unorganised, gig and platform workers.

South First Desk

Published Nov 25, 2025 | 6:29 PM ⚊ Updated Nov 25, 2025 | 6:49 PM

The biggest shift is the new rule that at least fifty percent of total remuneration must be counted as “wages”.

Synopsis: The Union government has brought into effect the four major labour codes nearly five years after their passage. Among them, the Code on Social Security (2020) is especially significant; it aims to widen protection for all categories of workers, but many salaried employees are concerned that the new definition of wages could lower their monthly take-home pay. South First sets out the key provisions and examines how they may affect workers across sectors.

The Union government on 21 November made effective the four labour codes: the Code on Wages (2019), the Industrial Relations Code (2020), the Code on Social Security (2020) and the Occupational Safety, Health and Working Conditions Code (2020). This comes more than five years after their enactment and notification.

The codes collectively consolidate twenty-nine separate labour laws into a “modernised framework”, according to the government, through simplification and ease of compliance.

Among the four codes, the Code on Social Security (2020) is especially significant. It brings together nine existing Acts, ranging from the Employees’ Provident Funds Act to the Maternity Benefit Act and the Unorganised Workers’ Social Security Act.

Apart from expanding social security and its benefits to more of the labour sector, it has also triggered anxiety among the salaried that it may cut into their take-home pay.

South First explains what the Bill actually says and likely impact on workers.

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The Code on Social Security, 2020: what changes?

The Code on Social Security brings a wide set of reforms, extending social security to all workers, including unorganised, gig and platform workers. It covers life, health, maternity and provident fund benefits, and introduces digital systems and facilitator-based compliance for greater efficiency.

Some of the major changes introduced under this code include:

Employees’ State Insurance Corporation (ESIC) now covers pan-India, removing the earlier requirement of “notified areas”. Even establishments with fewer than ten workers may opt in voluntarily. Coverage becomes mandatory for hazardous occupations and also extends to plantation workers.
Gig work is defined legally. Aggregator, gig worker and platform worker all have formal definitions. Platforms have mandatory contribution requirements. Aggregators must contribute 1 to 2 percent of annual turnover, capped at 5 percent of payouts to these workers.
A dedicated fund will support life, disability, health and old-age schemes for unorganised, gig and platform workers. Amounts collected through compounded offences will also go into this fund.
Accidents occurring during travel between home and the workplace will now be treated as employment-related, making compensation claimable.
Fixed-term employees will now qualify for gratuity after one year of service, instead of five years.

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Why this may reduce take-home salary

The biggest shift is the new rule that at least 50 percent of total remuneration must be counted as “wages”.

“Wages now include basic pay, dearness allowance, and retaining allowance; 50 percent of the total remuneration (or such percentage as may be notified) shall be added back to compute wages, ensuring consistency in calculating gratuity, pension, and social security benefits,” a PIB statement highlighting changes said.

Currently, widespread industry practice sees basic pay kept at 30 to 40 percent of CTC, which reduces PF and gratuity liability.

Because PF, gratuity and other statutory deductions depend on “wages”, a higher wage base means:

Higher PF contribution from employees. PF is deducted at 12 percent of wages. If the PF base increases from 35 percent of CTC to 50 percent, the employee’s PF outflow rises, directly reducing monthly take-home pay.
Higher employer contribution, but within the same CTC. In many companies, the employer’s PF contribution is part of the total CTC. So a larger portion of CTC is diverted into PF instead of cash allowances.
Expanded ESIC coverage increases statutory deductions. For eligible employees, ESIC deductions continue at 0.75 percent, but more workers now fall under ESIC because eligibility is wider.
Higher gratuity outflow for employers. Gratuity is 4.81 percent of wages. With a higher wage calculation, employer liability rises, which encourages companies to adjust salary structures under CTC models.

Does this mean the government is taking more money?

In effect, yes.

The EPFO corpus will grow as more salary becomes PF-eligible. ESIC coverage expands, increasing inflows. A new Social Security Fund collects aggregator contributions and compounded penalties.

However, it is important to note that these funds come from contributory social security programs specifically designated for employee welfare, rather than general tax revenues.

(Edited by Dese Gowda)