The New Labour Codes Are Here: CTC, Gratuity and the 2-Day F&F Rule
The codes are in force and central rules are notified. What the 50% wage definition, pro-rata gratuity for fixed-term staff and the two-working-day settlement rule mean for your payroll.
India's employment landscape is undergoing its most significant structural shift in decades. The four Labour Codes have been in force since 21 November 2025, and with the Central Government having notified the final central rules in May 2026, businesses can no longer afford a wait-and-see approach. State rules are still landing unevenly — but the direction is set, and the operational work is substantial.
For employers, HR leaders and payroll managers, transitioning to the new framework requires immediate operational alignment to prevent compliance penalties and unexpected financial liabilities. Here are the three pillars every organisation must address.
1. The 50% wage rule: redefining the Indian CTC
The most significant payroll disruption comes from the uniform definition of "wages" that runs across all four codes. Wages — essentially basic salary, dearness allowance and retaining allowance — must comprise at least 50% of total remuneration. If the excluded components (HRA, overtime, commissions, bonus and similar allowances) exceed 50% of total pay, the excess is added back into the wage calculation.
For years, companies structured payroll with a low basic (often 30–40%) wrapped in heavy special allowances to keep statutory contributions down. Under the codes, that old structure becomes a compliance violation. Restructuring to the 50% threshold will typically trigger:
- Higher employer and employee Provident Fund contributions
- Increased corporate liability for future gratuity payouts
- Higher leave encashment and overtime costs
For employees, long-term retirement savings grow substantially — but monthly cash-in-hand take-home visibly reduces as statutory deductions rise. Plan the communication as carefully as the restructuring.
2. The 2-day F&F rule: no more 30-day windows
One of the most demanding operational changes is Section 17(2) of the Code on Wages: wages payable to a departing employee must be settled within two working days of their final day. The timeline applies across forms of separation — including resignation, dismissal, retrenchment and closure.
An important nuance: the two-day clock applies to wage components under the statutory definition — unpaid salary, leave encashment and similar dues. Gratuity follows its own separate 30-day settlement window. But core wage components can no longer wait on slow internal clearances.
Meeting a 48-hour turnaround means re-engineering the exit workflow:
- Instant exit trigger — the moment a resignation is accepted, HR systems should notify IT, Finance, Admin and Payroll in parallel, not in sequence.
- Pre-clearance during notice — asset recovery, access revocation and expense audits completed by the last working day, not after it.
- Automated wage computation — payroll software calculates net dues instantly: exact working days, accrued leave encashment and TDS.
- Disbursement within 48 hours — final transfer plus an itemised settlement statement and digital relieving letter.
3. Gratuity: the 1-year rule for fixed-term employees
There has been real confusion about gratuity eligibility under the Code on Social Security. The position: for regular employees, the traditional five years of continuous service still applies. For fixed-term employees, the game has changed — under Section 53, a fixed-term employee who completes one year of service is entitled to gratuity on a pro-rata basis for the duration served.
Employers using fixed-term contracts should audit their headcount, identify active fixed-term agreements, and build pro-rata gratuity liabilities into annual budgeting now.
Old practice vs. new code reality
| Compliance topic | Old practice | New code reality |
|---|---|---|
| Wage & CTC balance | Allowances pushed to 60–70% to keep basic pay low | Core wages (Basic + DA) must be at least 50% of total remuneration |
| F&F settlement | 30–45 days after exit was common | Wage components paid within 2 working days of exit |
| Fixed-term gratuity | No payout without 5 years of service | Pro-rata gratuity after 1 year on a fixed-term contract |
| Take-home vs. savings | Higher cash-in-hand, smaller retirement corpus | Lower take-home, materially higher PF and gratuity savings |
Actionable next steps
- Audit existing payroll architecture — compare current CTC structures against the 50% definition and quantify how many employees need restructuring.
- Upgrade HRMS and payroll technology — systems must handle the allowance-overflow calculation, pro-rata gratuity and two-day exit cycles automatically.
- Revise employment contracts — reissue appointment letters that reflect the updated wage definitions, contract structures and notice terms.
- Track your states — implementation timing and procedural detail vary by state; monitor the rules that apply where your people actually sit.
Labour compliance operates under both central frameworks and state amendments, and several threshold-dependent provisions are still being notified. Consult qualified counsel before making permanent changes to HR policy.
