In the boardroom and on the factory floor, one question is dominating in 2026: “How do we restructure salaries without breaking the bank or the law?“
As India fully embraces the Four Labour Codes, the old way of “padding” CTC (Cost to Company) with endless allowances to keep the Basic Pay low is officially obsolete. Whether you’re hiring a permanent Payroll Employee or a Fixed-Term Employee (FTE), the rules of engagement have changed.
The Golden Rule: The 50% Wage Test
The most significant change is the “50% Cap on Exclusions.” Under the new codes, “Wages” (Basic Pay, Dearness Allowance, and Retaining Allowance) must constitute at least 50% of the total remuneration.
If allowances (HRA, travel, special allowance, etc.) exceed 50% of the CTC, the excess is automatically added back to the wage definition for calculating PF, Gratuity, and ESI.
1. Structuring CTC for Payroll (Permanent) Employees
For long-term team members, the focus is on sustainability and statutory compliance.
- The Basic Pay Anchor: Fix Basic Pay at ~50% of Gross CTC. This is the safest compliance harbor.
- Impact on Take-Home: A higher Basic Pay increases PF deductions (12% of a larger base). Employers may cap PF contributions at the statutory ceiling (₹15,000 wage base) unless they voluntarily extend higher coverage. Employees should be informed that while in-hand salary dips slightly, retirement corpus and gratuity benefits grow significantly.
- Gratuity Planning: Permanent staff remain eligible after 5 years, but liabilities rise because gratuity is now calculated on a higher wage base.
Tip: Update actuarial valuations to reflect the 2026 wage definition to avoid sudden balance sheet shocks.
2. Structuring CTC for Fixed-Term Employees (FTE)
FTEs are the agile force of 2026, but “fixed-term” does not mean “lesser benefits.”
- Statutory Parity: FTEs must receive the same wages and benefits as permanent employees doing similar work.
- Gratuity Eligibility: Subject to applicable rules and notifications, FTEs may be eligible for gratuity after completing one year of service, on a pro-rata basis.
- CTC Inclusion: Many companies now include a “Gratuity Accrual” line item in the FTE’s CTC to avoid hidden costs at contract end.
3. The “Helpful Peer” Compliance Checklist
Follow this 3-step audit to stay compliant:
- The Denominator Test: Calculate total remuneration (Total CTC minus employer PF/NPS and one-time bonuses). Ensure wages = at least 50% of this amount.
- Minimum Wage vs. Floor Wage: Confirm Basic Pay meets both the 50% rule and the applicable National Floor Wage or State Minimum Wage (whichever is higher, noting the Jan 2026 hike).
- Appointment Letter: A written offer letter is mandatory in 2026. It must clearly break down wage components to avoid disputes.
Disclaimer: This content is provided for educational and informational purposes only and does not constitute legal advice. While it reflects the 2026 rollout of the Four Labour Codes, payroll compliance is subject to specific state rules, statutory ceilings, and judicial interpretations. PF contributions and gratuity eligibility may vary. Always consult with a certified payroll auditor or legal counsel before finalizing salary structures.