CTC salary breakup under the new wage code: the 50% rule

A free guide for Indian employers setting up or revising salary structures. The four labour codes have been in force since 21 November 2025, and the Code on Wages, 2019 changes how a CTC is usually split. This page explains the main rule in plain English. It is general information, not legal or tax advice. State rules are still being notified, so confirm details with your payroll provider or CA.

What changed

Many Indian salary structures kept basic pay low (often 30–40% of CTC) and put the rest in allowances. PF, gratuity and some other statutory amounts are calculated on "wages", so a low basic kept those costs down.

The Code on Wages defines wages broadly as basic pay, dearness allowance and retaining allowance. It then excludes items such as HRA, conveyance, overtime, commission and the employer's PF contribution, but only up to a limit. If the excluded items together are more than 50% of total remuneration, the amount above 50% is added back to wages. The Code on Social Security, 2020 uses the same definition, so it carries through to PF and gratuity calculations.

Worked example

Monthly remuneration of ₹50,000, structured the old way:

Excluded items total ₹32,500, which is 65%. The limit is 50% (₹25,000), so the extra ₹7,500 is added back. Wages for statutory purposes = ₹17,500 + ₹7,500 = ₹25,000, whatever the payslip calls "basic".

Because of this, many employers now simply set basic (plus DA, if any) to at least 50% of total remuneration, so the payslip matches the statutory figure.

What it affects

• Gratuity: calculated on wages, so it rises when wages rise. Under the Code on Social Security, fixed-term employees qualify for gratuity after one year of continuous service, rather than the usual five years.
• Provident fund: contributions are a percentage of wages. Where PF is paid only up to the statutory wage ceiling, the effect may be small. Where it is paid on full wages, take-home pay falls and the employer's cost rises.
• Leave encashment, bonus and overtime calculations that refer to wages.
• Take-home pay: if CTC stays fixed and statutory contributions rise, net pay can fall. Explain this to employees before you restructure.

What to do in practice

1. List each employee's components and check whether excluded items exceed 50% of total remuneration.
2. Decide whether to restructure (raise basic) or keep the structure and compute statutory amounts on the added-back figure. Either is possible; the first is easier to audit.
3. Update the pay-breakup annexure in your appointment letters so new hires get a compliant split from day one.
4. Check state rules and your PF wage-ceiling policy with your payroll provider.

Templates

Our appointment letter template (₹199) includes an Annexure A pay breakup with a note on this rule. With custom drafting (₹2,499), we work out the annexure for a CTC you choose and flag any split above 50%.