The Modi government last month implemented the 4 Labour Codes, which, among several other things, are expected to reshape how salaried Indians earn, save and pay taxes. These Codes are – Code on Wages, Industrial Relations Code, Social Security Code, and Occupational Safety, Health & Working Conditions (OSHWC) Code. The third Code – Social Security Code – deals with various laws related to employees’ social security benefits and schemes like EPF, gratuity and other schemes. The Code also brings clarity with regard to the definition of ‘wages’ under the new law.
By redefining what counts as “wages” and mandating that basic pay should form at least 50% of salary, these laws may reduce your monthly take-home, but they also strengthen your long-term wealth and improve tax efficiency.
The government’s aim is clear. As per the notification, “Wages” now include basic pay, dearness allowance, and retaining allowance; 50% of the total remuneration (or such percentage as may be notified) shall be added back to compute wages, ensuring consistency for gratuity, pension and social security benefits.
This push towards a higher basic salary tightly links more of your compensation with retirement savings such as EPF, gratuity, and NPS contributions. The immediate question many employees are asking is: does this help or hurt my tax savings—especially under the New Tax Regime where deductions are limited?
Tax-saving opportunity hidden in rising basic pay
As basic salary rises, so does your contribution to retirement-linked instruments.
According to Dinkar Sharma, Company Secretary and Partner, Jotwani Associates, the shift “automatically increases an employee’s contribution to EPF or NPS if these instruments are linked to basic pay.”
Even for New Tax Regime taxpayers, where deductions are scarce, the employer’s contribution to NPS—up to 10% of salary—remains deductible under section 80CCD(2). Sharma points out that this benefit comes “with no upper monetary limit except the overall Rs 7.5 lakh cap on employer contributions to retirement funds.”
For those opting for the Old Regime, a higher EPF contribution simply increases Section 80C savings. Either way, the structure now does the tax planning for you. As Sharma says, “employees benefit from compulsory, tax-efficient retirement accumulation—reducing taxable income without requiring any active investment decision.”
The trade-off: less cash today, but more wealth tomorrow
The most visible impact will be a lower take-home salary. Employees are already reacting to this change. Someone on a Rs 10-lakh CTC could see their basic increase from Rs 3.5 lakh to Rs 5 lakh, raising PF deductions by around Rs 1,500 a month. That’s money leaving your bank account.
But the labour codes are designed this way deliberately. They shift income away from consumable cash and into long-term protection instruments. Sharma explains that “higher PF contributions grow tax-free, accumulate annually through compounding, and can form a significant retirement corpus that is both stable and legally protected.”
This forced savings design helps people who otherwise struggle to save consistently. As Sharma notes, these rules reduce behavioural risk because “instead of voluntarily saving (which many postpone), the system automatically builds wealth on their behalf.” The expanded wage base also makes statutory gratuity more meaningful, further strengthening long-term security.
What employers must fix—and what employees should check
The transition won’t be smooth for HR teams. Most companies will need to restructure cost-to-company formats, revise payroll software and reassess gratuity and provident fund liabilities. Sharma cautions that “any attempt to artificially inflate allowances to push basic pay below 50% will fail statutory tests and may invite scrutiny.”
Employees, meanwhile, must not sign revised salary structures blindly.
Sharma lists key checkpoints:
-Ensure basic pay is appropriately set so PF/NPS contributions align with the law.
-Look for employer NPS contributions because they create tax benefit even under the New Regime.
-Check that allowances are not inflated at the cost of long-term benefits.
-Make sure revised CTC disclosures reflect employer retirement contributions transparently.
This scrutiny matters because restructured salary sheets may reduce in-hand income even if overall benefits rise. Employers may create dual computation systems—one for payroll and one for PF/statutory calculation, which employees should understand rather than fear.
So, will you pay more tax or save more?
The answer depends on perspective.
Short-term: Yes, your net pay will fall, and tax-efficient allowances like HRA or reimbursements may shrink.
Long-term: Your PF corpus, gratuity entitlement and potential NPS benefits grow—most of which are tax-exempt on withdrawal.
The new Labour Codes are part of the government’s effort to simplify 29 separate labour laws into four integrated codes covering wages, industrial relations, social security and working conditions. In effect, the changes nudge workers toward longevity in savings, minimise arbitrary compensation structuring, and reinforce social protection.
Summing up…
If you focus only on monthly income, the new rules may look unfriendly. But if you view your salary as wealth building—through PF compounding, gratuity accumulation and long-term tax shelters—this shift is actually rewarding.
As Sharma summarises, understanding your revised compensation means you can “optimise the tax efficiency of revised compensation and ensure that the higher retirement deductions work in favour rather than eroding overall benefit value.”