For startups, the focus is often on fundraising, product-market fit, and scaling. Yet a silent deadline is approaching that could reshape your burn rate and employee cost structures: April 1, 2026.
The four Labour Codes were notified in late 2025, and the government has indicated they are expected to become fully operational from the start of the next financial year—April 1, 2026, subject to final notifications.
The question isn’t if you should restructure your CTC (Cost to Company), but whether you can afford not to.
Why Startups Are Most at Risk
Startups often attract talent by offering high “take-home” salaries through allowances (HRA, Special Allowance, LTA) while keeping the “Basic” component low. This reduces Provident Fund (PF) and Gratuity liabilities.
The New Rule: Under the Code on Wages, 2019, “wages” (used to calculate PF and Gratuity) must form at least 50% of total remuneration.
If your current structures look like this:
- Basic: 25%
- Allowances: 75%
Then, once the Code is enforced, the law will “deem” the excess allowances as wages. This means statutory costs (PF and Gratuity) could nearly double for that employee.
Restructuring Before April 2026: The Strategic Advantage
Waiting until the deadline risks a “double whammy”: a sudden spike in employer costs and reduced employee take-home pay, potentially triggering attrition.
1. The Gratuity Obligation for Fixed-Term Employees (FTEs)
Under the Social Security Code, 2020 (once enforced), Fixed-Term Employees will be eligible for pro-rata gratuity after just one year of service, compared to the current five-year requirement under the Payment of Gratuity Act, 1972. For startups relying on project-based talent, this is a significant new liability that must be provisioned in advance.
2. The ESOP Factor
Draft rules suggest that Employee Stock Options (ESOPs) and cash equivalents of stock awards may be excluded from the definition of wages. This provides relief for startups, allowing ESOPs to remain a competitive talent tool without inflating the statutory wage base. Employers should, however, monitor final notifications to confirm this position.
Current vs. Post-2026 CTC Structures
| Component | Typical Startup Structure (Pre-2026) | Code-Compliant Structure (Post-2026) |
| Basic + DA | ~25% of Gross Salary | ≥50% of Gross Salary (mandatory) |
| Allowances (HRA, LTA, Special, etc.) | ~75% of Gross Salary | ≤50% of Gross Salary (cap enforced) |
| Provident Fund (PF) | Lower employer contribution (on smaller Basic) | Higher employer contribution (on larger Basic) |
| Gratuity | Payable only after 5 years (under current Gratuity Act) | Pro-rata after 1 year for Fixed-Term Employees (once Social Security Code enforced) |
| ESOPs / Stock Awards | Often used to boost take-home without PF/Gratuity impact | Draft rules suggest ESOPs excluded from “wages” (await final notification) |
| Employee Take-Home | Higher (due to inflated allowances) | Lower (as PF/Gratuity deductions rise) |
| Employer Liability | Lower statutory costs | 5–10% increase in manpower costs (estimated) |
Your 3-Step “Pre-April” Roadmap
Step 1: Audit Your “Exclusion Bucket”
List all CTC components. If allowances (HRA, travel, special allowances) exceed 50% of gross salary, you have a compliance gap.
Step 2: Model the Impact on P&L
Run simulations: If the 50% rule applied today, how much would employer contributions increase? For many startups, the rise is estimated at 5–10% of total manpower costs, though actual impact varies.
Step 3: Phased Implementation for New Hires
Start issuing new offer letters with Code-compliant structures (50% Basic). This avoids the need to re-contract existing employees at the last minute.
Legal Disclaimer
This article is for educational purposes only and does not constitute legal or financial advice. Compliance requirements may vary based on final government notifications, state rules, and employment contracts. Startups should consult a qualified Labour Law Consultant or Chartered Accountant to assess the specific impact of the 2026 deadline on their payroll structures.