New labour code may reduce take-home pay despite unchanged CTC

India’s new labour code, which mandates that wages account for at least 50% of total compensation (CTC), is unlikely to result in a direct increase in basic pay, but could still reduce employees’ take-home salaries.

Under the revised framework, companies are expected to restructure salary components rather than mechanically raise basic pay to 50% of CTC. While the overall CTC and even basic salary may appear unchanged, the balance between allowances and statutory contributions is set to shift.

The code defines wages such that if exclusions such as house rent allowance, conveyance allowance, performance incentives, leave travel allowance and employer contributions exceed 50% of CTC, the excess must be added back to wages. This directly increases the base for calculating provident fund (PF) and gratuity.

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As a result, higher contributions towards PF and gratuity can actually reduce take-home pay. For instance, at a ₹15 lakh CTC, annual take-home salary could fall by up to ₹52,000 due to increased statutory deductions, even without a rise in basic pay.

Companies are likely to adopt a calibrated approach, rebalancing salary structures to comply with the rule while avoiding a sharp increase in fixed pay. Increasing basic salary upfront to 50% could significantly raise employer costs and reduce employee take-home income due to higher contributions to PF, NPS and superannuation.

At the same time, keeping basic pay too low may not be feasible, as components such as HRA are linked to it. This is expected to lead to a balanced restructuring of salary components rather than a uniform increase.

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The impact on take-home pay will also vary across tax regimes. While deductions under the old regime may partially offset higher PF contributions, the new regime offers limited relief despite a higher standard deduction of ₹75,000.

Employees are likely to see a shift towards higher long-term savings through PF and gratuity, even as monthly take-home pay declines.

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