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. Your Basic, HRA, LTA, PF, and Gratuity are all changing — here's exactly what it means for your pocket.

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. Previously many employers kept it as low as 35% of CTC. The increase directly raises your PF contribution and Gratuity accrual.

HRA — Now Fixed at 60% of Basic

HRA moves from a flexible component to a fixed 60% of Basic Salary. This exceeds the Income Tax exemption limits (50% metro, 40% non-metro) — so Old Regime employees paying rent can now claim the maximum possible HRA exemption.

LTA — Now Fixed at 16.67% of Basic

LTA is fixed at 16.67% of Basic (= 2 months Basic per year), paid monthly. Claim frequency (2 per 4-year block) is unchanged. Old Regime employees can still claim exemption with travel bills.

Conveyance — New Fixed Component at 5% of Basic

A new Conveyance Allowance component is added at 5% of Basic, capped at ₹15,000/month. This was not a standard component in many companies previously.

Special Allowance — Shrinks

Since Basic, HRA, LTA, and Conveyance all increase as fixed components, the residual Special Allowance will reduce. Your total CTC remains unchanged — only the internal distribution changes.

3 How the New Salary Structure Looks — Example

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

4 How PF Changes

PF remains at 12% of Basic Salary — but since Basic is increasing, your contribution also increases.

5 How Gratuity Changes — The Biggest Benefit

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

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 also increases. Impact: ~0.6% of CTC.

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

7 Tax Implications

The Labour Code restructuring does not change your total taxable income — tax continues to be calculated on your selected regime.

• Under Old Regime: Higher HRA enables more exemption on rent. Higher Employee PF increases 80C deduction. Slightly more tax savings possible.
• Under New Regime: HRA and LTA are fully taxable; higher 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 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 for a personalised before vs after comparison.
2. Compare tax regimes — Higher HRA 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.
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 with your UAN to ensure higher PF contributions are deposited from June 2026.

11 Frequently Asked Questions

Will my salary slip look different from June 2026?

Yes. You'll see new fixed line items for HRA (60% of Basic), LTA (16.67% of Basic), and Conveyance (5% of Basic). Special Allowance will be lower and 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, only Mumbai, Delhi, Kolkata, and Chennai are classified as metro cities (50% of Basic). Bengaluru, Hyderabad, and Pune are non-metro (40% of Basic). Your employer may pay HRA at 60% of Basic — the tax exemption limit is calculated separately.

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. Home owners simply cannot claim HRA tax exemption — it becomes part of taxable salary. There is no structural disadvantage for home owners.

Does the New Labour Code affect my NPS contribution?

Yes. If 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 from April 2026.