India’s new Labour Codes bring some of the biggest changes to Indian employment rules in decades. These laws affect how salaries are structured, how PF and gratuity are calculated, how many hours an employee can legally work, how quickly full and final settlement must be paid and what documentation companies must provide. While the laws are passed, full implementation depends on state notifications, so the impact will roll out gradually. However, the framework is clear enough for both employees and companies to start preparing because the changes will significantly affect payroll budgets, take-home salaries and compliance for organisations of all sizes.
New Labour Law Changes You Must Know
Here are the major provisions explained in simple terms.
1. Basic Salary Must Be 50 Percent of CTC
The biggest change is that basic salary must form at least half of the total cost to the company. Most companies earlier kept basic low, often 20 to 35 percent, in order to keep PF and gratuity payouts lower. Under the new rule, basic must be equal to or more than 50 percent of CTC. This single change will automatically increase PF and gratuity contributions. It will also reduce the flexibility companies had in splitting salaries across multiple allowances.
2. PF Contribution Will Increase Because PF Is Calculated on Basic
PF rates remain the same at 12 percent contributed by the employee and 12 percent by the employer. However, because basic becomes higher, PF deduction increases. This will reduce take home salary but increase long term savings. For employers, payroll cost rises because the matching contribution becomes larger.
3. Gratuity Becomes Costlier for Employers
Gratuity is calculated as 15 divided by 26 multiplied by last drawn basic multiplied by years of service. With a higher basic salary, gratuity liabilities rise automatically. The new code also allows fixed term employees to receive proportionate gratuity even if they have not completed five years of service. This expands the number of employees eligible for gratuity.
4. Work Hours Are Fixed at 48 Per Week
The new labour rules clearly state that no employee can work more than 48 hours a week. Companies can design this in different formats such as 8 hours for 6 days or 9 hours for 5 days or even a 4 day week with 12 hour shifts. Daily limit cannot cross 12 hours including breaks. Any extra time must be paid as overtime at twice the normal rate. This gives employees better work life balance and creates transparency in workload expectations.
5. Appointment Letters Are Mandatory
The new rules make it compulsory for employers to issue a written appointment letter with terms of employment, salary structure and conditions. Many small and medium companies still hire informally without proper documentation. This rule protects employees by giving them a formal record of employment terms.
6. Full and Final Settlement Must Be Completed Within Two Days
One of the most employee friendly changes is the requirement that FNF dues must be cleared within two working days from the last working date. Earlier, employees often waited 30 to 90 days for their settlements. This rule prevents unnecessary delays and ensures accountability.
7. Overtime Rules Become Stricter
Overtime must be paid at twice the wage rate and documented clearly. Companies can no longer force employees to work extra hours without fair compensation. This improves workplace rights across industries including factories, logistics, retail and IT enabled services.
8. Increased Social Security Coverage
Provisions for PF, ESI, maternity benefits, provident funds and insurance are now unified. Gig workers and platform workers also get social security benefits through dedicated schemes. This is an important step for India’s fast growing freelancer and delivery workforce.
9. Simplified Rules for Layoffs in Certain Companies
Companies with up to 300 employees can hire or remove staff without government approval. Earlier the limit was 100. This gives mid sized businesses more operational flexibility.
These Rules Are Passed But Implementation Will Be Staggered
The four Labour Codes are officially passed by Parliament, but full implementation depends on each state notifying the rules. Many states have completed drafts, but the national rollout has been slower than expected. Companies should expect these rules to come into force soon because most structural changes, like the 50 percent basic rule and 48 hour week, are already aligned with the direction of official policy.
New Labour Law Impact on Employees
For employees, the impact is mixed as follows:
- The rise in basic salary increases PF contributions, which reduces take-home salary for many but strengthens long-term retirement benefits.
- Gratuity will be significantly higher in the long run.
- The formal cap on weekly work hours improves work-life balance and protects employees from overwork.
- The mandatory appointment letter ensures clarity of terms and prevents exploitation.
- Quick FNF settlement is a huge relief for those switching jobs.
- Gig and platform workers also receive better access to social security, which was missing earlier.
- The main challenge for employees will be adjusting to lower in-hand salaries in companies where the basic is increased sharply.
New Labour Law Impact on Companies and Especially Startups and MSMEs
For employers, the cost of compliance increases. Higher basic salary increases PF and gratuity outflow. Startups and MSMEs, where salary structures were more flexible, will face higher monthly cash requirements. Many companies will need to redesign payroll systems, revise budgets and update contracts. Documentation standards will become stricter, which is difficult for smaller firms that do not maintain formal HR processes.
On the positive side, companies with up to 300 employees gain flexibility in workforce adjustments. Clear work hour rules reduce disputes. Uniform wage definitions simplify audits. MSMEs will need to invest in HR technology, legal support and compliant payroll structures to avoid penalties.
Conclusion
India’s new Labour Codes are a major transition in the country’s employment environment. By standardising wages, raising basic salary requirements, regulating work hours and increasing social security access, the laws aim to create a more formal and transparent labour market. Employees gain better protection, retirement benefits and timely settlements. Employers face higher costs and compliance responsibilities, especially small and growing businesses. However, the long term goal is to create a more stable, predictable and equitable workforce system. Once fully implemented, these laws will reshape how India works, hires, pays and grows.