Payroll & statutory · Updated September 2026
For years, employers structured CTC to minimise PF and gratuity cost by keeping basic salary low and pushing most of the package into allowances that don’t count toward those calculations. The Code on Wages, 2019 closes that loophole directly, and it’s now in force.
Under Section 2(y) of the Code, “wages” is defined broadly, and specific exclusions, allowances like HRA, conveyance, special allowance and bonus, are capped: if these excluded components add up to more than 50% of an employee’s total remuneration, the excess is deemed to be wages anyway. In effect, basic salary plus dearness allowance must together make up at least half of CTC, whatever the salary structure calls it. Gratuity itself is specifically excluded from the wages definition and isn’t subject to this cap.
Because PF and gratuity are both calculated on wages, a structure that was previously optimised for a low basic now produces a higher PF contribution and a larger eventual gratuity payout, for both employee and employer, once basic is pushed up to the 50% floor. Employers running CTC structures built before this rule took effect are generally expected to rework them rather than continue on the old, lower-basic model. The Code has been in force since 21 November 2025 alongside the other three Labour Codes; see our Labour Codes tracker for where state-level implementation actually stands.
The Code on Wages itself and its central rules are settled; state-level implementation detail is still uneven, so check the current status for your specific state before assuming full local enforceability.
It can lower it slightly, since a higher basic means higher PF deduction from your own pay, even though it also raises your retirement corpus and eventual gratuity.
No, gratuity is specifically carved out of the wages definition used for this calculation.
Model how a basic-heavy structure changes your numbers with the Salary Breakup Calculator and the PF Calculator.