India’s New Labour Code: A Structural Shift in Benefit Calculations

Effective Date: November 21, 2025

The Regulatory Change

The Code on Wages, 2019 introduces a transformative mandate: minimum 50% of total remuneration must now be classified as “wages”, comprising Basic Pay, Dearness Allowance, and Retaining Allowance. If an employee’s wages fall below this threshold, the law presumes wages to constitute 50% of total remuneration for statutory calculations.

This represents a fundamental departure from traditional Indian compensation structures, where Basic + DA typically ranged between 30-40% of CTC. The implications for gratuity valuations are profound and immediate.

Mathematical Impact on Gratuity Liability

The gratuity formula under the Payment of Gratuity Act remains unchanged:

Gratuity = (Last Drawn Wages × 15/26) × Completed Years of Service

However, the “Last Drawn Wages” component has expanded significantly.

Illustrative Example:

Consider an employee with the following compensation structure:

Impact Analysis:

For an employee with 10 years of service:

• Pre-Labour Code Gratuity: (₹40,000 × 15/26) × 10 = ₹230,769
• Post-Labour Code Gratuity: (₹57,500 × 15/26) × 10 = ₹331,731

Increase per employee: ₹100,962 (43.7% increase)

Actuarial Valuation Implications

1. Defined Benefit Obligation (DBO) Impact

The increase in wage base flows directly through the actuarial valuation model. For a typical organization with:

• 500 employees
• Average tenure: 8 years
• Average age: 38 years
• Pre-Labour Code wages at 35% of CTC

Estimated DBO increase: 25-40%

The magnitude depends on:

• Current salary structure composition
• Employee demographics (age and service distribution)
• Salary escalation assumptions
• Discount rate applied

2. Current Service Cost (CSC) Impact

The annual expense recognition increases proportionally. Organizations must budget for:

• Higher recurring gratuity expenses
• Increased provisions in financial statements
• Potential EBITDA compression

3. Sensitivity Analysis Considerations

Actuaries must now model multiple scenarios:

Data Requirements for Actuarial Valuations

To ensure compliance with the New Labour Code, Organizations must provide actuaries with:

• Dual salary data sets:
  • Current structure (pre-Labour Code)
  • Restructured wages (post-Labour Code compliance)
• Component-wise breakdown:
  • Basic Pay
  • Dearness Allowance
  • Retaining Allowance (if applicable)
  • All excluded allowances
• CTC reconciliation:
  • Verification that wages ≥ 50% of total remuneration
  • Documentation of any deemed wage calculations

Strategic Considerations for Employers

Immediate Actions Required:

• Salary Restructuring Assessment:
  • Analyze current compensation structures
  • Model scenarios for Basic + DA increases
  • Evaluate impact on take-home pay vs. long-term benefits
• Financial Planning:
  • Budget for increased gratuity provisions
  • Communicate impact to stakeholders
  • Consider phased implementation if feasible
• Actuarial Engagement:
  • Request preliminary impact assessment
  • Ensure dual-scenario valuation in year-end reports
  • Plan for past service cost recognition

Conclusion

The 50% wage rule represents the most significant structural change to gratuity valuations in decades. Organizations with traditionally low Basic salary components face liability increases of 25-50% or more. Proactive assessment and strategic salary restructuring are essential to manage this transition effectively.

The actuarial profession plays a critical role in quantifying these impacts, ensuring compliance, and guiding organizations through this regulatory transformation. Early engagement with actuarial consultants is strongly recommended to navigate the FY 2025-26 valuation cycle successfully.

Note: This analysis is based on the Code on Social Security, 2020 and Code on Wages, 2019, effective November 21, 2025. This does not constitute a professional opinion or legal advice. Organizations should consult with actuarial professionals for specific guidance.