With the phased enforcement of the Code on Social Security, 2020 (notified from late 2025), Indian payroll structures are undergoing their most significant transformation in decades. The transition from the legacy ESI Act, 1948 to the new framework has redefined the very meaning of a “salary.”
As a Senior Labour Law Consultant, I’ve seen HR teams scrambling because they treated the 50% Rule as a suggestion rather than a statutory mandate. In 2026, compliance is no longer about timely payments, it’s about structural integrity.
1. The Core Change: What is the 50% Rule?
Under Section 2(88) of the Code on Social Security, “wages” now include Basic Pay + Dearness Allowance + Retaining Allowance, which together must constitute at least 50% of total remuneration.
If allowances (HRA, Conveyance, etc.) exceed 50%, the excess is deemed wages and added back to the wage base for calculating ESIC and EPF contributions.
2. The ESIC Threshold Trap
- The ESI wage ceiling remains ₹21,000 per month (as per prevailing notification).
- Because “wages” have been redefined, employees who were previously outside the ESI net may now fall within it.
Example:
- Legacy Structure: Gross salary ₹24,000, but “wages” for ESI were only ₹18,000 → Covered.
- New Rule: If allowances exceed 50%, deemed wages may push the wage base above ₹21,000 → Employee may exit ESIC.
- Twist: If allowances are reduced to meet the 50% rule, more employees may fall under the ₹21,000 cap and require mandatory registration.
Important Note: ESIC coverage is determined at the time of joining and continues until the end of the contribution period, even if wages later exceed the ceiling.
3. Step-by-Step Restructuring Guide
To stay compliant in 2026, employers should follow this logic:
- Step 1: Ensure Basic + DA is at least 50% of Gross Remuneration.
- Step 2: Limit excluded components (HRA, Conveyance, Commission) to the remaining 50%.
- Step 3: Calculate ESIC contributions (Employer: 3.25%, Employee: 0.75%) on the new wage base.
- Step 4: Conduct a net impact analysis—expect a dip in take-home pay as higher wages mean higher statutory deductions.
4. CTC Calculation Template: The 50% Rule Impact
Scenario: Monthly CTC = ₹30,000 | We have taken example location: Maharashtra (Professional Tax applicable)
| Component | Legacy Structure (Pre-2026) | New Structure (2026 Compliance) | Difference |
| Basic Pay + DA | ₹10,500 (35%) | ₹15,000 (50%) | + ₹4,500 |
| HRA & Allowances | ₹17,243 | ₹12,118 | – ₹5,125 |
| Employer PF (12%) | ₹1,260 | ₹1,800* | + ₹540 |
| Employer ESIC (3.25%) | ₹902 | ₹965 | + ₹63 |
| Gratuity (≈4.81% of Basic)** | ₹505 | ₹722 | + ₹217 |
| Total Monthly CTC | ₹30,410** | ₹30,605** | + ₹195 |
*PF contributions are capped at ₹15,000 wage base unless employer opts for higher coverage.
**Employers typically adjust “Special Allowance” downward to keep total CTC fixed at ₹30,000.
**Gratuity Clarification: The Payment of Gratuity Act, 1972 provides for 15 days’ wages for every completed year of service, calculated as (15 ÷ 26) × monthly wages. When annualized across 12 months, this works out to approximately 4.81% of Basic + DA. Employers often include this percentage in CTC structures as a provision, but actual gratuity is payable only upon separation after eligibility.
Myth vs. Fact: Gratuity in CTC
- Myth: Gratuity is a fixed 4.81% deduction from salary.
- Fact: Gratuity is not deducted monthly. The 4.81% figure is a provisioning convention used in CTC structures, derived from the statutory formula (15 days’ wages ÷ 26 working days). Actual gratuity is payable only after 5 years of service (or earlier in cases of death/disability), and is calculated on the employee’s last drawn Basic + DA.
5. Employee Take-Home Impact
| Deduction | Legacy Structure | New Structure | Impact |
| Employee PF (12%) | ₹1,260 | ₹1,800 | More savings |
| Employee ESIC (0.75%) | ₹208 | ₹223 | Higher coverage base |
| Professional Tax | ₹200 | ₹200 | No change |
| Total Deductions | ₹1,668 | ₹2,223 | + ₹555 |
| In-Hand Salary | ₹26,075 | ₹24,895 | – ₹1,180 |
6. Strategic Analysis
- The “Invisible” Pay Cut: Employees see ₹1,180 less in their monthly bank account.
- The “Wealth” Gain: PF corpus and gratuity eligibility grow on a higher wage base of ₹15,000 instead of ₹10,500.
- Compliance Advantage: ESIC is now calculated on “deemed wages.” Excess allowances beyond 50% are added back, potentially altering eligibility.
Concluding Remark –
Employers often view this as an increased cost. In reality, the statutory outflow rises modestly, but the benefits are substantial: reduced litigation risk, standardized audits, and stronger compliance.
Authorities are increasingly using digital scrutiny of ECR filings to cross-check adherence to the 50% rule. A mismatch is an automatic red flag.
Disclaimer: This article is intended for educational purposes only and does not constitute legal advice. The Code on Social Security, 2020 and related labour laws are subject to central notifications and state-specific rules. Employers should consult a qualified labour law professional or compliance advisor before restructuring payroll or making statutory contributions.