India’s four new labour codes — the Code on Wages, the Industrial Relations Code, the Code on Social Security, and the Occupational Safety, Health and Working Conditions Code — came into force nationwide on November 21, 2025, consolidating 29 older labour laws into one framework. Central rules followed in April 2026, with individual states still phasing in their own rules through 2026.
For any company hiring in India, whether directly or through an Employer of Record, these codes change how wages, gratuity, overtime, and termination are calculated. This guide covers what actually changed and what it means for payroll.
- The “50% wage rule” (Code on Wages, Section 2(Y)) now requires basic pay + dearness allowance + retaining allowance to equal at least 50% of total compensation — any excess allowances count as wages for PF, gratuity, ESI, and bonus calculations.
- Daily working hours are capped at 8 (down from 9) under the Occupational Safety Code, with overtime now mandatory at double the regular wage rate nationwide.
- Fixed-term employees qualify for gratuity after just 1 year of service, down from the 5-year threshold that still applies to permanent employees.
- Social security coverage (PF and ESI) now extends to gig workers, platform workers, contract workers, and part-time staff — groups previously excluded.
The 50% Wage Rule: Why It Changes Every Payroll Calculation
Under the old framework, employers could structure compensation with a low basic salary and large “allowances” (HRA, special allowance, etc.) to minimize the wage base used for PF, gratuity, and bonus calculations. The Code on Wages closes that gap: basic pay, dearness allowance, and retaining allowance together must now equal at least 50% of total compensation. Any amount paid as allowances beyond that 50% threshold is legally reclassified as “wages” and pulled into the calculation base.
Example: an employee earning ₹20,000 basic plus ₹80,000 in allowances previously had PF and gratuity calculated on ₹20,000. Under the new rule, ₹30,000 of the “excess” allowance shifts into the wage definition, raising the effective calculation base to ₹50,000 — a direct increase in PF and gratuity cost for the employer.
Working Hours and Overtime
Gratuity Eligibility: The Big Change for Fixed-Term Hires
Gratuity eligibility has historically required 5 years of continuous service — a threshold most fixed-term and contract employees never reached. Under the new Social Security Code, fixed-term employees now qualify for gratuity after just 1 year, while permanent employees still need 5 years. Combined with the expanded wage definition from the 50% rule, gratuity payouts are higher across the board.
Social Security Now Covers Gig, Platform, and Contract Workers
The Code on Social Security extends PF and ESI coverage to groups the old laws largely excluded: gig workers, platform workers (delivery, ride-share, freelance digital platforms), contract workers, and part-time staff. Employers and aggregator platforms engaging these workers now have statutory contribution obligations that didn’t previously exist.
Mandatory Appointment Letters
Every worker, including those in the unorganized sector, must now receive a written appointment letter specifying wages, employment terms, and dispute-resolution procedures. This closes a long-standing compliance gap where informal or verbal hiring arrangements were common.
What Employers Should Do Now
Since central rules took effect in April 2026 but state-level implementation is still phasing in through the rest of the year, the practical risk for employers is applying old payroll structures in states that have already notified final rules. Gujarat, Arunachal Pradesh, Haryana, Madhya Pradesh, Karnataka, and Maharashtra are among the states that have finalized rules for all four codes as of this writing — employers with headcount in those states should prioritize a compensation structure review first.
Don’t want to re-architect payroll for the new codes yourself?
Asiacruit keeps every India hire compliant with the Wage Code, Social Security Code, and gratuity rules automatically — whether you have a registered entity or not.
Book a Demo →Frequently Asked Questions
The four labour codes came into force nationwide on November 21, 2025. Central rules followed in April 2026, and individual states are still phasing in their own implementation through 2026.
Under the Code on Wages, basic pay, dearness allowance, and retaining allowance together must equal at least 50% of an employee’s total compensation. Any allowances paid above that threshold are legally reclassified as wages, which expands the base used for PF, gratuity, ESI, and bonus calculations.
Yes. Fixed-term employees now qualify for gratuity after 1 year of continuous service, compared to the 5-year requirement that still applies to permanent employees.
Yes. An EOR like Asiacruit restructures compensation to meet the 50% wage rule, applies correct overtime and working-hour limits, and calculates gratuity and social security contributions under the new codes automatically.