India's four Labour Codes: what changed for payroll on 21 November 2025

Four Codes, one commencement date

India replaced 29 separate labour laws with four Codes: Wages, Industrial Relations (IR), Social Security, and Occupational Safety, Health and Working Conditions (OSH). All four came into force on 21 November 2025.

Final Central Rules followed on 8 May 2026. These Rules fill in operational detail the Codes leave to government notification — daily-hours limits, licence formats, return formats.

Most state rules are still drafts. A Code provision can be “in force” at the Central level while the state machinery that operationalises it locally is not yet final. Treat “notified” and “in effect” as two different things until you check the specific state.

Some Code provisions also sit on top of legacy machinery that has not been switched off. The EPF Scheme still runs on the EPF & MP Act 1952, with its ₹15,000 wage ceiling. ESI still runs on its ₹21,000 ceiling. Both survive until Code-based schemes are separately notified. This guide flags where that gap matters for payroll.

The five payroll changes, ranked by impact

1. The 50% wages-deeming rule. One definition of “wages” now replaces roughly twelve different definitions. Wages = basic pay + dearness allowance + retaining allowance. If everything else — allowances, bonus, employer PF — adds up to more than half of total pay, the excess gets added back into “wages” for benefit calculations. Read the full worked example.

This is the single change that reaches every other line item below. Gratuity, leave encashment, overtime and (once Code-based PF schemes are notified) provident fund all compute off this one re-based number.

2. Gratuity, on the new base, with a fixed-term shortcut. Gratuity now runs off deemed wages instead of basic-plus-DA. Fixed-term employees qualify after one year of service, pro-rata, instead of the old five-year requirement. See gratuity’s new math.

3. Provident fund, dormant for now. The PF contribution base does not move yet — EPFO still runs on the 1952 Act’s ₹15,000 ceiling. But any employer whose PF policy is uncapped, or references “wages” directly, is already affected by the deemed-wages increase. See PF and the new wage definition.

4. Overtime, on a higher base. The 2× overtime floor is unchanged, but the rate it multiplies is now deemed wages, not basic. Allowance-heavy pay structures see a real overtime cost increase. See overtime and working hours.

5. Fixed-term employment, formally recognised nationwide. Fixed-term contracts are now a standard, pan-India hiring form, with mandatory parity in pay and benefits versus permanent staff doing the same work. The trade-off: gratuity now accrues from month thirteen. See fixed-term employment.

What to re-check first

Start with a full-census recomputation of deemed wages, not a sample. The 50% rule affects some employees and not others, depending on how their CTC is structured — a sample can hide the outliers that cost the most.

Next, separate what changed today from what is dormant. Gratuity and leave encashment moved on 21 November 2025. PF and ESI contribution bases have not moved, because the Code-based schemes that would apply the new wage definition to them are not yet notified.

Then check your state. Central Rules are final; most state rules are still draft. A payroll process that is compliant under the Central Rules text may still need a state-specific check before you rely on it.

Finally, connect the labour-law change to its tax consequence. The Income-tax Act 2025 took effect on 1 April 2026. It kept its exemption ceilings static — for example, gratuity’s ₹20 lakh cap under §19 — while the labour-law base under it went up. A bigger Code-driven payout does not automatically mean a bigger tax-free payout. Each cluster-1 guide in this series states the specific interplay.

A note on penalties

The Codes also raise the cost of getting this wrong. Under the Code on Wages, underpayment draws a fine up to ₹50,000 for a first offence. A repeat offence within three years draws a fine up to ₹1 lakh, with possible imprisonment. Compounding, where available, runs at 50% of the maximum fine for fine-only offences and 75% where imprisonment is also possible. Under the Social Security Code, deducting an employee’s PF or ESI contribution and failing to deposit it draws imprisonment. The term is one to three years, plus a ₹1 lakh fine, and this offence is not compoundable. Getting the wage re-base wrong is not just a cost-modelling error; it is a compliance exposure with real penalties attached.

Where this connects to shadow payroll

If you run payroll for assignees into or out of India, the deemed-wages base is one of three separate calculations a shadow payroll must reconcile. The other two are International Worker PF wages and Income-tax Act 2025 taxable salary. See the complete shadow payroll guide for how the three interact.

General guidance, not legal advice — confirm your specific position with India counsel or your payroll provider.