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The implementation of India’s new labour codes has sparked widespread discussion among salaried employees. Many are concerned about one key question: will the new labour laws reduce monthly take-home salary and increase tax liability? According to labour law experts and financial advisors, the answer is yes—at least in the short term, though the long-term impact may be beneficial.

The government has replaced 29 existing labour laws with four comprehensive labour codes, aiming to simplify compliance, ensure uniformity, and strengthen social security for workers. While these reforms are designed to improve employee welfare, they are also expected to change how salaries are structured across companies.

What Is the Biggest Change in Salary Structure?

One of the most significant provisions under the new labour codes is related to basic salary. As per the new rules, an employee’s basic pay must be at least 50% of the total Cost to Company (CTC).

Currently, many companies keep basic salary at around 30–35% of CTC, distributing the remaining amount through allowances such as House Rent Allowance (HRA), special allowance, travel allowance, and reimbursements. This structure helps reduce mandatory deductions, allowing employees to take home a higher monthly salary.

With the new rule, companies will need to revise salary breakups, leading to a higher basic salary component.

Why Take-Home Salary May Reduce

Several key salary components are directly linked to basic pay. These include:

• Provident Fund (PF): 12% of basic salary

• Gratuity: Calculated based on basic pay

• Leave encashment: Linked to basic salary

When basic pay increases, contributions towards PF and gratuity also increase. While this improves long-term savings, it results in higher deductions from monthly salary, reducing the amount credited to the employee’s bank account each month.

Higher PF and Gratuity: A Long-Term Advantage

Experts point out that although take-home pay may decline, employees will benefit from higher retirement savings. Increased PF contributions mean a larger retirement corpus, and higher gratuity payouts at the time of exit or retirement.

In simple terms, employees may receive less cash today, but more financial security in the future.

Impact on Income Tax

The new labour codes may also lead to a higher tax burden for some employees. Allowances often enjoy partial or full tax exemptions. When the allowance portion of salary reduces and basic pay increases, the taxable income may rise.

As a result:

• Fewer tax-free allowances

• Higher taxable salary

• Increased monthly tax deduction

This further contributes to a reduction in net take-home salary.

Should Employees Be Worried?

Financial experts advise employees not to panic. While short-term cash flow may be affected, the revised structure promotes better financial discipline and stronger social security. Employees are encouraged to review their salary structure, reassess tax planning strategies, and explore exemptions, deductions, and retirement planning options to offset the impact.

Final Takeaway

The new labour codes mark a structural shift in how salaries are calculated in India. While employees may notice a dip in monthly take-home pay and a slight rise in taxes, the reforms aim to deliver higher retirement benefits, improved job security, and long-term financial stability.