The rollout of the new labour laws has changed the way companies structure salaries. With basic pay now required to be at least 50% of total remuneration, employers are facing higher contributions towards provident fund (PF), gratuity and other statutory benefits.
This has sparked a big question among employees ahead of the appraisal cycle — will companies moderate salary hikes citing higher compliance costs?
While the reform strengthens long-term retirement benefits, it may reshape take-home salary and increment patterns in the short term.
What has changed under the 4 new Labour Codes?
Effective November 21, 2025, the new wage definition mandates that basic pay must form at least 50% of total cost-to-company (CTC). Any allowance beyond that cap is added back for calculating statutory contributions like PF, ESIC, bonus, overtime and gratuity.
This restructuring has multiple effects:
-Higher PF and gratuity contributions
-Increased employer manpower costs (estimated 5–10%)
-Lower in-hand salary if overall CTC remains unchanged
-Greater retirement corpus over time
In sectors like IT and BPO, where margins are already tight, companies may feel more pressure during appraisal season.
Will annual increments and bonuses be affected?
According to Rishi Agrawal, CEO and Co-Founder of Teamlease Regtech, the shift is more structural than discretionary.
“The unified wage definition under the Code on Wages, 2019 standardises how wages are calculated across social security laws. It mandates that statutory wages must be at least 50% of total remuneration. Allowances beyond this cap are added back for the purpose of calculating PF, ESIC, bonus, overtime, and gratuity.”
He explains that if companies keep the total CTC unchanged, higher statutory contributions will reduce in-hand salary.
“If companies maintain the same overall CTC, higher statutory contributions will reduce in-hand salary. Annual increments and performance bonuses will need to be recalibrated within this framework. The shift is structural, not discretionary. Once salary architecture is realigned, the transition becomes a one-time reset.”
In simple terms, employees may not see a drastic fall in total CTC growth, but take-home pay growth could be slower this year.
Can companies legally moderate salary hikes?
One concern among employees is whether employers can justify softer increments by citing compliance costs.
Agrawal clarifies: “There is no legal prohibition on moderating salary hikes due to increased statutory costs. Employers are required to comply with the revised wage definition and contribution rules. How they structure increments within that framework is a managerial decision in line with the demand and supply situation of the specific sector, subject to contractual commitments and applicable standing orders.”
However, he stresses that statutory benefits cannot be diluted.
He also points out that companies with historically low basic pay and high allowance structures will see the steepest impact. Once they restructure to comply with the 50% rule, gratuity calculations rise automatically — increasing long-term liabilities.
From a governance perspective, he underlines that transparency is critical. If organisations absorb the additional cost, employees’ take-home remains protected. If not, the impact shifts to employees.
Gratuity liability to rise sharply for some firms
The increase in gratuity burden could materially affect company balance sheets, especially for firms that previously kept basic pay low.
Mr. Zubin Billimoria, President of BCAS, explains the accounting angle:
“Wages” as defined in the code (comprising Basic Pay, Dearness Allowance, and Retaining Allowance) to mandatorily constitute at least 50% of the total remuneration. Since gratuity is calculated on last drawn wages, this definitional change would substantially increase gratuity obligations for those entities whose wages, as defined above, were less than 50% of the total remuneration. These changes would be construed as plan amendments as defined in AS-15 and Ind AS-19 to be treated as past service costs to be treated as under:
a) For entities applying AS-15, these need to be expensed on a straight line basis over the average vesting period and expensed off immediately to the extent already vested (Para 94 of AS-15).
b) For entities applying Ind AS-19, these need to be expensed off over the earlier of the plan amendment date or when restructuring costs are recognised (Para 103 of Ind AS-19). Accordingly, the impact would be greater for such companies.”
This means some companies may see a one-time spike in payroll-related liabilities, especially during the transition year.
Big boost for retirement benefits
While short-term take-home pay may feel tighter, the long-term benefits are significant.
Agrawal says: “Yes, the long-term impact is significant. A higher statutory wage base increases PF contributions and raises gratuity liability. Gratuity will now be computed on the revised statutory wage base rather than a lower basic component, increasing terminal benefits across tenure. For example, if an employee completes 10 years of service, gratuity on a ₹15,000 monthly wage would be approximately ₹86,500. On a ₹25,000 monthly wage base, it increases to roughly ₹1.44 lakh. Even though the law operates prospectively, gratuity is calculated on the last drawn wage if the employee exits after implementation. This means the higher wage base applies to the entire completed tenure for computation purposes, creating a meaningful uplift in terminal benefits.”
This clearly shows the trade-off: lower liquidity today versus stronger retirement security tomorrow.
Fixed-term employees gain
Another major shift is that fixed-term and contract employees will now be eligible for gratuity after completing just one year of service, compared to the earlier five-year threshold for permanent staff. This improves parity and strengthens social security coverage.
So, will appraisals be weak this year? The answer is nuanced. Total CTC growth may not collapse. High performers are likely to continue receiving differentiated hikes. However, take-home salary growth may slow. Margin-sensitive sectors may offer more conservative increments. Companies with high allowance-heavy structures face greater short-term stress.
The reform is essentially a structural reset of salary architecture. Once companies absorb and provision for the higher PF and gratuity exposure, the system is expected to stabilise.
For employees, the key is understanding that while monthly cash in hand might feel tighter, retirement benefits are set to improve meaningfully under the new framework.