Hello again! In 2026, the “PF/ESI Split” remains one of the most debated boardroom topics. Employers are recalculating contribution costs, while employees are noticing subtle shifts in take-home pay.
If you’re wondering whether you can still “split” a salary to lower your statutory burden, you’re essentially asking:
Can I still use the old playbook in a new game?
Let’s unpack the legal reality of salary structuring under India’s New Labour Codes.
1. The End of the Allowance-Heavy Structure
Under the Code on Wages, 2019 and the Social Security Code, 2020, the definition of “wages” has been unified and capped to prevent excessive exclusions.
- The 50% Rule: If the sum of excluded components (HRA, travel, commission, etc.) exceeds 50% of total remuneration, the excess is added back to the wage base.
[Code on Wages, Sec. 2(y) proviso] - The Add-Back Mechanism: This ensures that at least half of the CTC is treated as “wages” for PF, ESI, and gratuity calculations.
[Social Security Code, Sec. 2(78)]
You can still label allowances for internal tracking, but for statutory purposes, the government recalculates your wage base if exclusions breach the 50% threshold.
2. The Supreme Court’s Universality Test
Even before the Codes were fully notified, the Supreme Court clarified wage treatment in the landmark Vivekananda Vidyamandir case (2019).
- Universality Principle: If an allowance is paid ordinarily, universally, and necessarily to all employees in a category, it qualifies as “basic wages” for PF.
[EPF Act, 1952 + SC Judgment: Vivekananda Vidyamandir] - 2026 Reality: If you split a ₹50,000 salary into ₹15,000 Basic and ₹35,000 “Management Allowance,” and that allowance is paid to all staff, EPFO will merge it and issue a notice for under-contribution.
3. The Dual Wage Problem
We’re in a transition phase:
- Gratuity & ESI: Governed by the new Codes and the 50% wage rule.
- PF: Still governed by the EPF Act and Supreme Court jurisprudence — until fully subsumed by the Social Security Code.
This creates a compliance challenge: different wage bases for different benefits. Attempting to “split” salary now often leads to administrative complexity and audit risk.
4. The Safer Path: Unified Compliance Structure
Most consultants now recommend:
- Avoiding allowance-heavy splits
- Aligning PF, ESI, and gratuity on a common wage base
- Using transparent salary slips with statutory references
This reduces litigation risk and simplifies audits under the New Labour Codes.
Conclusion: The old salary playbook is no longer legally safe. The New Labour Codes and Supreme Court rulings have closed the loopholes. A unified, transparent wage structure is now the gold standard for compliance.
Disclaimer: This content is provided for educational and informational purposes only and does not constitute legal advice. While we aim for 100% legal integrity, labour laws in India are subject to state-specific notifications and judicial review. Please consult with a legal professional before implementing major payroll changes.