New Labour Code 2026: How It Changes Your Salary, PF & Gratuity

India's New Labour Code is no longer a future event — it's here. With an effective date of 1 April 2026, the Code on Wages 2019 is reshaping how salaries are structured for crores of salaried Indians. If you're a salaried employee, your Basic Salary, HRA, LTA, PF deduction, and Gratuity are all changing — and your take-home pay will be affected.

This guide explains exactly what is changing, why, and what it means for your monthly salary and long-term retirement wealth — with real numbers.

1. What Is the New Labour Code?

The Government of India consolidated 29 existing labour laws into 4 simplified Labour Codes. The one most directly impacting salaried employees is the Code on Wages, 2019, which redefines what counts as "wages" and requires that wages form at least 50% of total remuneration.

2. What Exactly Is Changing in Your Salary Structure?

Basic Salary

Basic Salary is being standardised at 40% of Base Pay (Base Pay = Basic + HRA + LTA + Conveyance + PDA + Special Allowance). Previously, many employers kept Basic as low as 35% of CTC. The increase in Basic directly raises your PF contribution and Gratuity accrual.

HRA — Now Fixed at 60% of Basic

HRA moves from being a flexible component (often part of an FCP basket) to a fixed component at 60% of Basic Salary. This is higher than the Income Tax exemption limits (50% of Basic for metro cities, 40% for non-metro) — so if you live on rent, you'll be able to claim the maximum possible HRA exemption under the Old Tax Regime.

LTA — Now Fixed at 16.67% of Basic

Leave Travel Allowance is being fixed at 16.67% of Basic (= 2 months Basic per year), paid monthly as a salary component. LTA claim frequency (2 claims per 4-year block) remains unchanged. Under the Old Tax Regime, you can still claim LTA exemption by submitting travel bills.

Conveyance — New Fixed Component

A new Conveyance Allowance component is being added at 5% of Basic Salary, subject to a maximum of ₹15,000/month. This was not a standard component in many companies earlier.

Special Allowance — Shrinks

Since Basic, HRA, LTA, and Conveyance are all increasing as fixed components, the residual Special Allowance (the balancing flexible component) will reduce. Your total Base Pay remains the same — only the internal distribution changes.

3. How the New Salary Structure Looks — Example

Here is a comparison for an employee with a monthly CTC of ₹1,14,967:

4. How PF Changes

PF is still calculated at 12% of Basic Salary — for both employee and employer. But since Basic is increasing, your PF contribution also increases.

5. How Gratuity Changes — The Biggest Benefit

This is where the New Labour Code genuinely benefits employees. Gratuity is now calculated on Wages instead of Basic Salary alone.

6. Impact on Take-Home Salary

Yes, your monthly take-home will reduce moderately. Here's why:

• Higher Employer PF and Gratuity within CTC — these increase within your fixed CTC, so less is available as gross salary. Impact: ~1.5% of CTC.
• Higher Employee PF deduction — since Basic increases, your own PF deduction (12% of Basic) also increases. Impact: ~0.6% of CTC.

Combined, the take-home reduction is typically within 2% of CTC before any employer uplift. Many large employers are providing a one-time permanent uplift of 0.5%–1.5% on TTC to offset this impact.

7. Tax Implications

The Labour Code restructuring is purely a salary structure change — it does not change your total taxable income. Tax continues to be calculated on your selected regime (Old or New).

• Under Old Regime: You can claim HRA exemption (on actual rent), LTA exemption (on travel bills), and higher 80C deduction (due to higher Employee PF). Slightly more tax savings possible.
• Under New Regime: HRA and LTA are fully taxable. Higher Employee PF gives no deduction. But lower slab rates may still make New Regime better — use the SalaryBit calculator to compare.
• Employer PF above ₹7.5L/year: If combined employer contributions (PF + NPS + Superannuation) exceed ₹7.5 lakh annually, the excess becomes taxable as a perquisite. Relevant for high-CTC employees.

8. What Is NOT Changing

• Your Total CTC / Total Target Compensation remains exactly the same
• Variable Pay and bonus structures are completely unaffected
• LTA claim frequency (2 per 4-year block) is unchanged
• Tax regime options (Old vs New) remain available as before
• Scholars, interns and gig workers on stipends are not affected
• Car Lease arrangements continue — excess EMI adjusted from component order

9. Timeline: When Does This Happen?

10. What Should You Do Now?

1. Calculate your new in-hand salary — Use SalaryBit's Labour Code calculator to see exactly how your take-home changes.
2. Compare tax regimes — Higher HRA in your salary may make the Old Regime more attractive. Recalculate for FY 2026-27.
3. Check your employer's uplift — Ask HR if a CTC uplift is being provided to offset the take-home impact. This is common among large employers.
4. Update HRA declarations — If you pay rent, submit rent receipts to your employer to claim HRA exemption (Old Regime only).
5. Verify your EPFO account — Log in to the EPFO portal with your UAN to ensure higher PF contributions are being deposited from June 2026.

11. Frequently Asked Questions

Will my salary slip look different from June 2026?

Yes. You will see new fixed line items for HRA (60% of Basic), LTA (16.67% of Basic), and Conveyance (5% of Basic) on your payslip. Special Allowance will be lower. Employee PF deduction will be higher. Your employer should also issue a revised salary letter by June 2026.

Is Bengaluru a metro city for HRA purposes?

For HRA tax exemption calculation, only Mumbai, Delhi, Kolkata, and Chennai are classified as metro cities (50% of Basic). Bengaluru, Hyderabad, and Pune are non-metro (40% of Basic). However, your employer may pay HRA at 60% of Basic — the tax exemption limit is separate from what you receive.

What if I own a house — does HRA affect me?

HRA will appear as a fixed component in your salary regardless of whether you own or rent. If you own a home, you simply cannot claim HRA tax exemption — the component becomes part of your taxable salary. There is no structural disadvantage for home owners.

Does the New Labour Code affect my NPS contribution?

Yes. If you are enrolled in NPS through your employer, contributions are calculated as a percentage of Basic Salary. Since Basic increases, your NPS contribution will also increase proportionately, effective from April 2026.