The 50% wage rule under the Labour Codes, explained with examples
The Labour Codes, in force since 21 November 2025, introduce a single definition of wages. Its best-known effect is the 50% rule: basic pay, dearness allowance and retaining allowance together should make up at least half of an employee's total pay.
What is excluded from "wages"
Allowances such as HRA, conveyance and travel allowance, overtime, commission, employer PF/pension contributions, gratuity and expense reimbursements are excluded. If these excluded items add up to more than 50% of total pay, the excess is added back to wages.
A worked example
Monthly gross ₹60,000 with basic ₹20,000 (33%):
- Excluded allowances: ₹40,000 — that's ₹10,000 more than half of ₹60,000
- Wages for PF and gratuity = ₹20,000 + ₹10,000 = ₹30,000
With PF on full wages, employee PF becomes 12% × ₹30,000 = ₹3,600 instead of ₹2,400. With PF capped at the ₹25,000 ceiling, it is 12% × ₹25,000 = ₹3,000.
How to structure salaries now
- Keep basic + DA at 50% of gross or more — this keeps PF and gratuity predictable.
- Use HRA (50% of basic in metros, 40% elsewhere) and a balancing special allowance for the rest.
- Re-check offer letters: a higher basic means more PF and gratuity, which affects take-home and CTC.
Our salary calculator defaults to basic = 50% of gross, warns you when a structure falls below 50%, and computes PF on the correct wage figure either way.
General information only — please consult your adviser for your situation.
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