Ever since the New Labour Codes were notified last month, a wave of confusion has emerged among organised sector employees. The worry stems from the government’s move to enforce a uniform definition of wages.
Under this rule, core salary components such as basic pay, dearness allowance, and retaining allowance must now make up at least 50% of a person’s total salary package (CTC).
At first glance, this sounded alarming for lakhs of salaried workers. The logic was simple:
If basic pay becomes higher, then provident fund (EPF) contribution — which is linked to basic pay — also rises. Naturally, employees feared that this shift would reduce their monthly take-home pay.
Why did this change happen?
The government made this change under Code 3 – The Code on Social Security, 2020, with one purpose — consistency.
Earlier, companies structured salaries very differently. Some pushed most of the salary into allowances and kept basic pay low. This helped them reduce statutory payouts on PF, pension, and gratuity. The new definition forces companies to maintain a balance and ensures that social security benefits are calculated fairly.
Under this, if allowances exceed 50% of the total salary, the extra portion must be transferred back to “wages” for statutory calculations.
Now, the Union Labour Ministry steps in to clear confusion
With rising anxiety, the Labour Ministry came forward to clarify that the New Labour Codes do not reduce take-home pay in all cases.
A key condition decides the outcome — whether PF contributions are calculated on the statutory wage ceiling or on the actual wage.
At present, EPF rules mandate that PF must be calculated only up to Rs 15,000 per month, unless the employee and employer voluntarily agree to contribute more.
The government’s example explains it clearly
Let’s take an employee earning Rs 60,000 per month:
Basic + DA = Rs 20,000
Allowances = Rs 40,000
Before the New Labour Codes
Only Rs 20,000 was treated as statutory wage, but PF calculation was capped at Rs 15,000.
So employer PF (12%) = Rs 1,800
Employee PF (12%) = Rs 1,800
Take-home pay = Rs 56,400
After the New Labour Codes
Allowances cannot exceed 50% of salary.
Here allowances are Rs 40,000 — much higher than allowed.
So Rs 10,000 must be added back to wages, making statutory wage Rs 30,000.
However — PF calculation still applies only on Rs 15,000 unless both sides voluntarily choose to pay PF on Rs 30,000.
Which means:
Employer PF remains Rs 1,800
Employee PF remains Rs 1,800
Take-home salary stays Rs 56,400
The real takeaway – Yes, the definition of “wages” goes up on paper.
But take-home pay does not fall as long as PF contribution is restricted to the statutory ceiling of Rs 15,000.
Only if the employer and employee decide to contribute PF on actual wage (Rs 30,000 in this example) will PF deductions increase — reducing take-home income but building higher retirement savings.
What is this statutory PF ceiling and why does it matter?
The Rs 15,000 EPF ceiling means PF contributions are compulsory only up to this limit. Anything above is voluntary.
This cap is crucial — it protects employees from automatically losing more money from their monthly salary simply because companies restructure pay under the new codes.
Unions want the ceiling raised
Interestingly, labour unions have been demanding for years that this statutory limit be revised upward so that workers enjoy higher social security benefits.
The ceiling was last revised in 2014, when it was increased from Rs 6,500 to Rs 15,000.
Since then, it has remained unchanged, despite rising wages and inflation.
Summing up…
So while the new labour codes did trigger concerns of reduced pay, the government insists that nothing changes for employees as long as PF remains tied to the existing Rs 15,000 ceiling. The real impact will be felt only if and when the statutory ceiling is raised or if employees voluntarily choose higher PF contributions in exchange for greater retirement savings.