2025 Labour Code Reforms: Company Payroll Impact & Updates

The year 2025 is a significant milestone for the Indian job industry, including employees, HR, finance teams, payroll teams, and the workforce. On 21st November 2025, the Indian government passed the much-awaited amendments to Indian labour laws through four labour codes. The codes ensure transparent approaches that would reform the entire payroll system across all industries.

These four Labour Codes are:

• The Code on Wages, 2019
• The Industrial Relations Code, 2020
• The Code on Social Security, 2020

The Occupational Safety, Health, and Working Condition Code, 2020.

These new regulations redefine wages, working hours, overtime, social security, and gratuity, making it essential to update payroll software before they take full effect. But upgrading payroll systems goes beyond simply editing a few salary structures. It requires proper planning, system configuration, data restructuring, and staff training. In this, you are going to know exactly how to update your payroll software to align with the new wage and labour codes that come into force in 2025.

What are Changing in 2025

Before commencing a deep discussion about how these laws become effective on payroll system, let’s have a quick discussion about understanding the new changes on employee wages.

1. A 50% rule over CTC

One of the new changes mandate that the total amount including Basic Pay, DA, and Retaining Allowance must constitute at least 50% of the total . And on the other hand, any allowances and other non-wage components cannot exceed 50% of the employee’s total remuneration (CTC).

2. Shorter Gratuity Tenure

In any company, fixed-term employees now qualify for gratuity after completing 1 year, instead of 5 years.

3. Stricter Timelines for Payment of Wages

Companies must follow standardised timelines for, monthly wage disbursement, overtime pay-out, final settlement after resignation or termination. In case of overtime, employers must pay double the ordinary rate of wages.

Also Read:  New Labour Codes 2025: What Every Employer and Employee Must Know

What Changes should be applicable in Payroll for the New Wage & Labour Codes

To align with the rollout of India’s wage code, social security code, and occupational safety code, every organisation’s salary structure should be revised to support payroll processing. To remain compliant, companies need to implement specific payroll changes immediately and integrate an advanced payroll management software to align with the updates. Below are the essential payroll updates every organisation must perform.

Revise Salary structure according to new wage definition

In this code, the biggest shift is the uniform definition of wages which includes Basic + DA + Retaining Allowance. The new wage should be 50% or more of total salary. Rest allowances like HRA, special allowance, variable pay, etc. cannot exceed the remaining 50%.

Impact

• Higher PF contribution (PF = 12.5% of the Basic)
• Higher gratuity
• Higher leave encashment value
• Lower take-home salary for some employees

Required Changes

• Assure whether basic = 50% of CTC

• Ensure Basic + DA = minimum 50% of gross
• Do check, if allowances > 50%, adjust basic upward
• Update employee master data and salary structures
• Update salary revision templates

Update Provident Fund (PF) and ESI Calculations

According to ‘Basic’ increase, the PF/ESI contributions automatically rise. As PF is 12% of basic.

Impact

• Higher Basic = Higher PF Contribution from both employee and employer PF contributions.
• A minimal decline of Take-Home Salary as PF deduction rises, it effects slightly on lowering net salary.
• Employer’s PF share increases, raising overall payroll cost.
• Higher Retirement Corpus: Employees receive higher retirement corpus from increased long-term PF savings.
• Likewise, PF, if the revised Basic keeps employees within the ESI wage threshold, ESI contributions will rise proportionally.

Required Changes

• Reconfigure PF formula using the new 50% wage definition.
• Update ESI eligibility and contribution base.
• Ensure caps and exemptions remain aligned with employee categories.

Modify Overtime Calculation Rules

According to the new labour codes mandate, payment of the overtime charges double of the ordinary rate of wages. Besides, the limit of working hours set to 8 to 12 hours per day, 48 hours per week thinking about the work-life balance of the workers.

Impact

• OT amount = 2X revised Wages (Basic + DA forming at least 50% of CTC). So, the total OT pay-out significantly rises.
• Now OT is linked to a higher Basic, employers face: higher monthly payroll expense, Increased shift and production budgeting
• Companies can no longer use allowances to reduce OT liability.

Required Changes

• Update OT calculation formulas for accurate wages calculation
• Reconfigure shift definitions and weekly hour tracking.
• Sync the attendance and shift management system properly
• Update Payslip format with OT hours, rate, OT pay-out amount
• Modify statutory reports to show daily hours, weekly hours, double rate OT, etc.

Update Gratuity Eligibility and Accrual Rules

The gratuity formula is (15/26) ×Basic × Years of Service. The new codes make fixed-term employees eligible for gratuity after 1 year, instead of 5 years.

Impact

• Minimum one year of service becomes eligible for gratuity
• CTC value increases as gratuity has to be paid to a minimum one-year experienced employee
• F&F settlements become heavier.

Revised Changes

• Recognise fixed-term employees separately
• Recalculate gratuity liabilities in finance projections
• Company should revise the CTC structure
• Update the existing F&F module
• Include Gratuity norms in appointment letters & HR policy annually.
• Add monthly audit checks to track employees’ first work anniversary.

Also Read: New Gratuity Rules 2025 Explained: What Every Employee Should Know!

Update Payslip Formats

Payslips should now explicitly show all the updated changes by detailing all updates minutely. Here are the updates must be shown on payslips.

Required changes

• Mentioning Wage components step wise as per new definition
• Revised PF and ESI details should be mentioned in payslip
• Accurate OT and gratuity components should be highlighted as well
• Company should rework on allowance structures

Reconfigure Final Settlement (F&F) Timelines

New wage codes define strict timelines for payment of wages, a transparent settlement after resignation/termination

Required Changes

• Update F&F rule logic: if service ≥ 365 days, the company should include gratuity in F&F.
• Attach the gratuity calculation sheet to the F&F document.
• Recalculate salary arrears, if Basic was below 50% earlier.
• Rework last month salary based on new Basic/allowance structure.
• Update daily wage rate for final month on the revised wage definition.

Conclusions

The new wage and labour codes ensure significant updates on how organisations should approach payroll accuracy, transparency, and compliance. Now companies must rethink their salary structures, attendance integrations, and approval workflows. For the payroll teams, the key aim is to proactively update systems, align all payroll components with the new definitions, and ensure airtight compliance from day one. Organisations that adapt early will minimise financial risk, maintain employee trust, and build a more transparent and accountable payroll environment. Ultimately, these updates set the foundation for a compliant, future-ready workforce ecosystem.