The implementation of the Four New Labour Codes has redefined India’s regulatory environment, consolidating 29 legacy laws into a modern, technology-driven framework focused on ease of doing business and worker security.
As your strategic compliance partner, MYND continues its series on navigating these shifts, focusing on the operational realities businesses face in 2026. In this update, we examine the most significant factor in payroll management: The New Definition of ‘Wages’ under The Code on Wages.
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Redefining ‘Wages’ and the 50% Rule
The standardized definition of ‘wages’ has fundamentally altered payroll architecture and long-term statutory liabilities.
1. Inclusions and Exclusions: The definition explicitly includes basic pay, dearness allowance, and retaining allowance. However, it excludes specific components like house rent allowance (HRA), conveyance, employer contributions to retirement funds, and gratuity. The challenge for 2026 is ensuring these exclusions are documented correctly to avoid audit discrepancies.
2. The Critical 50% Condition: This remains the most vital compliance threshold. If the total of specified exclusions (HRA, allowances, etc.) exceeds 50% of the employee’s total remuneration, the excess amount is ‘deemed’ as wages. This deemed portion is added back to the wage base for statutory calculations, preventing companies from depressing ‘Basic’ pay to lower benefit contributions.
3. Impact on Statutory Benefits: This uniform definition serves as the base for calculating Provident Fund (PF), Gratuity, and leave encashment, often leading to a higher financial provision for long-term liabilities than under the previous regime.
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The 2026 Compliance Reality: Beyond the Transition
As we move deeper into 2026, the focus has shifted from mere awareness to financial optimization and audit readiness. The initial ‘grace period’ for restructuring has passed, and regulatory bodies are now looking for precise adherence to the 50% rule. Organizations are finding that while the new codes simplify the number of filings, the internal data management required to track ‘deemed wages’ monthly is significantly higher.
Current market trends show that businesses are increasingly utilizing automated payroll engines to calculate the 50% threshold in real-time, ensuring that monthly PF contributions remain compliant even when performance-based bonuses or varying allowances are paid out.
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Steps for Sustained Compliance Optimization:
✅ Audit Existing Structures: Conduct periodic reviews of salary structures to ensure that ‘deemed wages’ are not creating unforeseen liability spikes during high-payout months.
✅ Refine Financial Provisions: Update your long-term financial forecasting for Gratuity and Leave Encashment, as the broadened wage base will likely increase these end-of-service costs.
✅ Digital Integration: Ensure your HRMS and payroll systems are fully aligned with the Code’s definitions to automate the split between ‘Wages’ and ‘Exclusions’ without manual intervention.
Stay ahead of the curve. MYND provides the expertise and technology necessary to ensure your organization remains compliant in this unified labour framework.
* Note: All information in this post is based on official documentation from the Ministry of Labour & Employment, Government of India. For specific legal guidance, refer to the official Gazette notifications.
