The Labour Codes, explained for employers

India replaced 29 central labour laws with four Codes: the Code on Wages, 2019, the Code on Social Security, 2020, the Industrial Relations Code, 2020 and the Occupational Safety, Health and Working Conditions (OSH) Code, 2020. All four apply from 21 November 2025. The central rules under them were notified on 8 May 2026.

This guide covers the parts that change your payroll. It is written for HR and finance heads, not lawyers, and it says plainly where the law is still unsettled.

Which rules apply to you

The Codes are central laws, but rules are made by two governments.

• Central rules apply where the Centre is the “appropriate government”: railways, mines, oilfields, major ports, air transport, banking, insurance and central public sector undertakings, among others.
• State rules apply to most private employers for wages, working conditions and industrial relations.
• For the Social Security Code, the Ministry’s FAQs say a private employer working in more than one state follows the central rules.

States are still finishing their rules. Until a state does, its old rules carry on as far as they fit the Codes (the Ministry’s FAQ of 30 December 2025 relies on section 6 of the General Clauses Act for this). Check your state’s position before you change pay dates or overtime caps.

The new meaning of “wages”

All four Codes use the same definition of wages. It drives PF, ESI, gratuity, bonus, overtime and leave pay, so it matters more than anything else here.

Wages include basic pay, dearness allowance (DA) and retaining allowance: in short, your “basic plus DA”.

Wages leave out a list of items, including:

• house rent allowance (HRA);
• conveyance and travel concessions;
• the employer’s PF and pension contributions;
• statutory bonus that isn’t part of the contract;
• overtime and commission;
• gratuity, retrenchment compensation and other retirement benefits.

The Ministry’s FAQs add that performance incentives, ESOPs, variable pay and reimbursements are not wages. Its additional FAQs of 16 March 2026 say annual performance incentives are not wages either.

The 50% rule

Here is the catch. If the excluded items together come to more than half of total pay, the amount above half is added back to wages.

In practice this means basic plus DA should be at least half of pay, or the law treats it as if it were.

A worked example

Asha’s monthly pay is ₹60,000:

Component	Monthly
Basic plus DA	₹18,000
HRA	₹9,000
Conveyance	₹3,000
Special allowance	₹30,000
Total	₹60,000

Half of total pay is ₹30,000. Treating HRA, conveyance and special allowance as excluded, the excluded items come to ₹42,000. That is ₹12,000 above half, so ₹12,000 is added back.

Asha’s wages under the Codes: ₹18,000 + ₹12,000 = ₹30,000.

Her PF, gratuity and other wage-linked figures now start from ₹30,000, not ₹18,000.

What is still unsettled

• “Special allowance” isn’t on the excluded list. Read literally, an allowance that the Act doesn’t exclude is simply wages. On that reading Asha’s wages would be ₹48,000 (basic, DA and special allowance), not ₹30,000. Most employers and the Ministry’s own FAQ example treat general allowances as excluded up to the 50% limit, as we did above. Take advice on your own structures.
• What goes into “total pay” for the 50% test. The additional FAQs say overtime, employer PF and pension, and statutory bonus are counted in the test, while gratuity, ESI and other retirement benefits are not. Commentators read this slightly differently, so agree a method with your adviser and apply it consistently.
• Pay in kind (such as food) counts as wages only up to 15% of total wages.

The Ministry’s FAQs are guidance, not law. We found no court ruling on these points yet.

Deductions: no more than half of wages

Under section 18 of the Code on Wages, all deductions in a wage period together can’t take more than 50% of that period’s wages. The excess is carried forward and recovered in later periods, again within the 50% limit each time.

Example. Ravi’s wages for October are ₹20,000. He has a loan EMI of ₹8,000 and an advance recovery of ₹4,000 due, ₹12,000 in all. You can deduct only ₹10,000 this month. The other ₹2,000 moves to November.

Deductions also need to be of an authorised kind. Fines and deductions for absence or damage need notice and a chance for the employee to explain first.

Paying wages on time, and within two working days when someone leaves

• Monthly pay must be paid before the 7th of the following month.
• When someone leaves, whether by resignation, dismissal, removal, retrenchment or closure, section 17(2) of the Code on Wages says their wages must be paid within two working days. Unlike the old law, this covers resignations and has no salary limit.
• Gratuity keeps its own clock: within 30 days of becoming payable.

Example. Meera’s last working day is Friday 30 October 2026. Your office is closed on weekends. Her final wages are due by Tuesday 3 November 2026.

Unsettled: the Code ties the two days to the event (for example, the resignation), and commentators differ on whether that means the date of resignation or the last working day. Most employers work from the last working day. LiveLaw’s analysis (3 October 2026) also notes that recovering unserved notice pay or a joining bonus from final wages may not be a permitted deduction. Get advice before you hold back money from a leaver.

Gratuity, including fixed-term staff

Gratuity under the Social Security Code works much as before, with two changes that matter:

• Fixed-term employees get gratuity after one year of continuous service, pro rata, instead of five.
• Gratuity is worked out on wages under the new definition, including any 50% add-back. The Ministry’s additional FAQs say this applies from 21 November 2025.

The formula is unchanged: last monthly wage ÷ 26 × 15, for each completed year of service (a part year of more than six months counts as a year). The ceiling stays at ₹20,00,000.

Example. Karan, on a fixed-term contract, leaves after 1 year 7 months on wages of ₹40,000. The 7 months count as a year, so he has 2 years. Gratuity: ₹40,000 ÷ 26 × 15 × 2 = ₹46,154. A fixed-term employee who leaves after 11 months gets nothing.

Unsettled: whether service before 21 November 2025 should be valued at the new wage. The FAQ reads as “yes, on the last wage drawn”; some advisers disagree.

Overtime and the 48-hour week

• Normal hours are 8 a day and 48 a week. A long day is not overtime if the week stays within 48 hours.
• Overtime is paid at at least twice the ordinary rate, with the worker’s consent. Under the central rules, the daily rate is the monthly wage ÷ 26 and the hourly rate is the daily rate ÷ 8. Fifteen to thirty minutes counts as half an hour, and more than thirty as a full hour.
• The cap in the central OSH rules is 144 hours of overtime in a quarter.
• Rest day: at least one a week, and no more than 10 days in a row without one.

Example. Sunil’s wages are ₹26,000 a month. His daily rate is ₹1,000 and his hourly rate ₹125, so overtime is ₹250 an hour. Ten hours of overtime in the month: ₹2,500.

Unsettled: who the overtime rule covers (the Ministry’s FAQ says anyone whose minimum wage is fixed under the Code, which can include supervisors), whether HRA and conveyance count in the overtime base, and whether the 144-hour cap covers every establishment or only some. Several states still apply their own older caps until they notify new rules.

What to check in your payroll

1. Test your salary structures against the 50% rule, including employer PF and statutory bonus in the total. Look at your most common structures, not just one.
2. Tag each component as wages, an excluded item, or not pay at all (reimbursements, incentives). Decide how you treat special allowance.
3. Recalculate PF and ESI on the new wages. See our guide to the PF wage ceiling of ₹25,000, which applies to the same wages.
4. Cap loans, advances and recoveries at half of the month’s wages and carry the rest forward.
5. Pay leavers within two working days, on a separate run if you need to. Clearances need to happen before the last day, not after.
6. Add fixed-term staff to your gratuity working after one year, and recompute gratuity on Code wages.
7. Check overtime against the 48-hour week and the quarterly cap, and pay it at twice the rate.
8. Earned leave: one day for every 20 days worked, once 180 days are worked in a calendar year.
9. Watch your state’s rules for pay dates, overtime caps and registers.

How Dexta handles this

• The 50% wage rule. Dexta Pay works out wages under the Codes, adding back allowances above half of pay. It is switched on per company, and a settings card lists every unsettled point (such as special allowance) with its default and the reason, for you to decide.
• The deductions cap. With the Codes switched on, Pay limits loans, advances and recoveries to half of the month’s wages and carries the rest forward.
• Exit pay. Pay can run a leaver’s last month on its own, so wages go out within two working days.
• Gratuity. Pay works out gratuity on Code wages, including fixed-term staff after one year, capped at ₹20 lakh, inside the full and final settlement.
• Overtime. Dexta Time counts overtime daily, weekly or both against the 48-hour week, rounds it as the wage rules say, and warns at 144 hours in a quarter. Pay then pays it at twice the hourly rate (this needs Dexta Time shifts).
• Earned leave. Dexta Time can accrue earned leave at one day per 20 days worked once 180 days are worked, with refused leave carried forward.

This is general guidance, not legal advice.