TalentCo HR Services LLP

Menu
Contact Us

Tag: EPF

Transitioning to the 2026 Indian Labour Codes: A Compliance Roadmap for SMEs

Posted on by TalentCo HR Services

India’s four Labour Codes have been passed by Parliament. Several states have already published their draft rules, and the central government has indicated intent to operationalize the Codes, with implementation timelines dependent on state-level rule finalisation. For Indian SMEs, this is no longer just a future concern — it requires proactive preparation from businesses ahead of implementation that demands structured action.

Understanding What Has Changed

The four Labour Codes — the Code on Wages, 2019; the Industrial Relations Code, 2020; the Code on Social Security, 2020; and the Occupational Safety, Health and Working Conditions Code, 2020 — consolidate 29 existing central labour laws. The changes they introduce are not cosmetic.

The Code on Wages, 2019, introduces a revised definition of wages with specified inclusions and exclusions, along with a 50% threshold for allowable exclusions. This may impact how PF contributions are computed, as wage structures align with the revised definition. Under the new definition, if allowances beyond the excluded categories exceed 50% of total CTC, the excess must be treated as wages, increasing the PF base. For organisations that have structured salary to keep Basic low, this will require a fundamental redesign.

The Code on Social Security, 2020, expands the ambit of EPF and ESI coverage. It also introduces new categories of workers, including gig and platform workers, into the social security framework. SMEs working with contract and gig labour must account for these obligations as rules are notified.

Where the Compliance Gap Is Largest for SMEs

Most Indian SMEs face three concentrated areas of risk under the new framework:

  • Salary structure misalignment: CTC templates designed to minimise PF deductions will not hold under the new wage definition. Retrospective liability for PF arrears under Section 14B of the EPF Act, 1952, can attract damages of up to 100% of the arrears due.
  • Leave and working hours: The Codes standardise definitions for working hours, overtime thresholds, and leave entitlements. SMEs operating on informal leave policies without documented records will find it difficult to demonstrate compliance during audits.
  • DPDP Act obligations on employee data: The Digital Personal Data Protection Act, 2023, requires that employee data — including Aadhaar, bank details, and health records — is stored securely, processed lawfully, and deleted when no longer required. Unsecured or poorly managed data storage practices may not meet these standards.

A Practical Compliance Roadmap

The transition to Labour Code compliance does not need to be disruptive. It does, however, need to be structured. The following sequence is a practical starting point for SMEs:

  1. Audit your current salary architecture: Map each CTC component against the new wage definition under the Code on Wages. Identify whether Basic salary, as currently structured, meets the 50% threshold requirement.
  2. Recalculate PF and ESI liability: Once wage definitions are corrected, rerun PF and ESI calculations. Determine whether contribution amounts will change and plan for the revised employer cost.
  3. Document all leave and attendance policies: Convert informal leave practices into written, time-stamped policies. Ensure attendance and leave records are maintained digitally and are audit-ready.
  4. Secure employee personal data: Move employee data from unencrypted shared files or email threads to a system that provides access controls, audit logs, and defined data retention policies.
  5. Update employment contracts and standing orders: The Industrial Relations Code alters provisions around notice periods, layoffs, and standing orders. Contracts should be reviewed by a qualified HR or legal professional and updated accordingly.

The Role of Structured HR Systems

Structured HRMS platforms built for Indian compliance — such as ABStart, are designed around these regulatory requirements. Its payroll engine automates PF, ESI, and TDS calculations, and its record-keeping module maintains audit-ready documentation. For SMEs looking to move from manual spreadsheets to a compliant operation, this kind of purpose-built infrastructure reduces both the transition effort and the ongoing compliance risk.

Key Takeaways

  • The four Labour Codes are passed legislation; full enforcement is expected to deepen through 2026 as states finalise rules.
  • Salary structures that suppress Basic wages to reduce PF liability will be directly non-compliant with the Code on Wages, 2019.
  • Regulatory scrutiny may increase as compliance frameworks evolve; inaccurate contribution records carry significant retrospective penalties.
  • The DPDP Act, 2023, makes informal employee data storage in spreadsheets a compliance liability — penalties for non-compliance can be significant, depending on the severity of the violation.
  • Structured HRMS platforms purpose-built for Indian regulatory requirements, like ABStart, convert compliance risk into controlled, audit-ready processes.

References

Reader’s Note: TalentCo HR Services LLP is an HR consulting and solutions company offering services across HR operations, compliance, payroll management, and HR technology through its proprietary platform — ABStart. This article is intended for general informational and educational purposes only. Labour laws, tax regulations, and compliance requirements are subject to change based on government notifications and jurisdictional updates. Readers are advised to independently verify current regulations or consult qualified professionals before making any business or financial decisions.

CTC vs. Take-Home Salary

Posted on by TalentCo HR Services

One of the most common points of confusion for working professionals in India is the difference between the CTC mentioned in an offer letter and the amount that actually gets credited to their bank account each month. This article breaks down the structure of CTC, explains each component clearly, and helps readers understand where their salary goes and why.

What Is CTC?

CTC is an acronym for Cost to Company. It represents the total annual expenditure an employer incurs on an employee. This includes not just the monthly salary, but also contributions toward statutory savings, benefits, and other allowances.
When a company states a CTC of ₹20 LPA (Lakhs Per Annum), it means the total cost of employing that individual across all heads, some of which are paid monthly, some held for the future, and some directed toward statutory obligations.
CTC is not the same as the amount deposited into an employee’s account each month. That figure is called take-home salary or in-hand salary, and it is always lower than CTC.

Components of CTC

 1) Basic Salary

Basic salary is the fixed core component of the compensation structure. It is usually between 40% and 50% of the total CTC and is fully taxable under Indian income tax law.

Under the Code on Wages, 2019, the government mandated that the basic salary must be at least 50% of total remuneration. This move was intended to reduce the practice of artificially suppressing Basic salary to lower statutory contributions like the Provident Fund, Gratuity, Leave encashment, Bonus, etc.

2) House Rent Allowance (HRA)

HRA is a component provided to help employees meet rental expenses. It is typically calculated as a percentage of Basic salary:
      • 50% of the basic salary for employees in metro cities (Mumbai, Delhi, Kolkata, Chennai)
      • 40% of the basic salary for employees in non-metro locations
HRA is partially exempt from income tax for employees who pay rent, subject to conditions specified under Section 10(13A) of the Income Tax Act. Employees living in their own homes or with family without paying rent do not qualify for this exemption, and the full HRA becomes taxable in their case.

3) Special Allowance

Special allowance is the residual amount that fills the gap between the defined components and the total CTC. It is fully taxable and does not carry any specific statutory benefit or exemption. Its presence in the salary structure primarily serves to complete the CTC computation.

4) Provident Fund (PF)

Employees’ Provident Fund (EPF) is a statutory savings mechanism governed by the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952. Both the employer and the employee contribute 12% of the employee’s Basic salary to the EPF account each month.
The employer’s contribution of 12% is included within the CTC figure. This is a significant reason why the CTC appears higher than the actual take-home amount. These funds are accessible to the employee upon retirement, resignation after a qualifying period, or under specific permitted withdrawal conditions.
With higher Basic salaries under the new Labour Codes, EPF contributions increase proportionally, strengthening long term financial security even if short-term take-home is marginally lower.

5) Gratuity

Gratuity is a statutory benefit payable under the Payment of Gratuity Act, 1972. It is a lump sum amount paid by the employer when an employee leaves the organization after completing at least five continuous years of service. It is calculated as 15 days’ Basic salary for every year of completed service. Although gratuity accrues over the tenure of employment, it forms part of the CTC structure from day one.

6) Other Allowances and Benefits

CTC may also include the following components, depending on the employer’s salary policy:
    • Medical Allowance – provided for healthcare-related expenses
    • Conveyance Allowance – for commuting costs
    • Leave Travel Allowance (LTA) – partially exempt from tax for eligible travel within India
    • Performance Bonus – variable pay linked to individual or company performance
The inclusion and value of these components vary by organization, role, and industry sector.

CTC, Take home salary, In Hand Salary, HRA, EPF, Gratuity, PF, TDS, Tax

Deductions That Reduce Take-Home Salary

1) Tax Deducted at Source (TDS)

Employers are required to deduct income tax at source before crediting the monthly salary. The amount deducted depends on the employee’s total taxable income for the year and the tax regime they have opted for. (Ref: Section 192, Income Tax Act)
As of Budget 2023, the New Tax Regime is the default option. Employees may, however, opt for the Old Tax Regime if it is more beneficial, given deductions available under sections such as 80C, 80D, and exemptions like HRA.

2) Professional Tax

Professional tax is a state-level levy applicable in several Indian states. The amount typically ranges between ₹150 and ₹200 per month, depending on the state and income bracket. It is a relatively minor deduction but is reflected on every payslip.

3) Employee’s PF Contribution

As noted above, 12% of the basic salary is deducted from the employee’s gross pay each month and deposited into their EPF account. While this amount belongs to the employee, it is not immediately accessible and forms part of their long term savings.

How Take-Home Salary Is Calculated

The following formulas provide a standard framework for understanding the relationship between CTC and take home salary: 

Gross Salary = CTC − Employer’s PF Contribution − Gratuity − Other Non-Cash Benefits
Take-Home Salary = Gross Salary − (Employee’s PF + TDS + Professional Tax)

For illustrative purposes: on a CTC of ₹10 LPA, the monthly take-home salary typically falls in the range of ₹65,000 to ₹72,000, depending on the city of residence, applicable tax regime, and specific salary structure. Actual figures will vary based on individual circumstances and employer policy.

Impact of the New Labour Codes

The Government of India has consolidated multiple labour laws into four new Labour Codes: the Code on Wages, the Industrial Relations Code, the Code on Social Security, and the Occupational Safety, Health and Working Conditions Code. Once fully implemented, these codes are expected to bring meaningful changes to how salary structures are designed: 

    • Higher Basic salary thresholds will lead to proportionally higher PF, Gratuity, Leave encashment and bonus contributions. 
    • Clearer definitions of wages will reduce ambiguity in how CTC is structured.
    • Extended social security coverage for gig and platform workers. 

Employees may notice a slight reduction in short-term take-home salary as Basic salary proportions increase. However, this also means stronger statutory savings and greater long-term financial security.

Key Takeaways

Understanding the structure of CTC helps employees make informed financial decisions, from tax planning to evaluating job offers. The key distinctions to remember are:
    • CTC is the employer’s total cost of employment — it is not the same as take-home salary.
    • Several components within CTC are directed toward future savings or statutory obligations.
    • Deductions, including TDS, employee PF, and professional tax, reduce the gross salary to the amount actually received.
    • The New Tax Regime is the default option from FY 2023-24 onwards, though employees may evaluate the Old Regime based on their eligible deductions.
    • The new Labour Codes, once implemented, will further reshape salary structures across organisations.
 

References

[1] Code on Wages, 2019 – Ministry of Labour and Employment (Official Act): labour.gov.in – The Code on Wages, 2019
[2] Employees’ Provident Fund Organisation (EPFO) – Official Website: www.epfindia.gov.in
[3] EPFO – About EPFO and EPF Act, 1952: epfindia.gov.in/site_ en/AboutEPFO.php
[4] Income Tax Department – Section 10(13A) HRA Exemption & Section 80C: incometax.gov.in
[5] Income Tax Department – Official Portal: www.incometax.gov.in
[6] Ministry of Labour and Employment – Labour Reforms Overview (PIB): pib.gov.in – Labour Reforms: Code on Wages & Four Labour Codes
[7] Code on Wages 2019 – PRS Legislative Research Summary: prsindia.org – Code on Wages, 2019
[8] Payment of Gratuity Act – Ministry of Labour: www.labour.gov.in

 
Readers Note:

TalentCo HR Services LLP is an HR consulting and solutions company offering services across HR operations, compliance, liasoning, payroll management, and HR technology through its proprietary platform — ABStart.
This article is intended for general informational and educational purposes only. Labour laws, tax regulations, and compliance requirements are subject to change based on government notifications and jurisdictional updates. Readers are advised to independently verify current regulations or consult qualified professionals before making any business or financial decisions.
Our role is to simplify and present complex HR and payroll concepts in a comprehensible manner for business owners, HR professionals, and employees.

ABStart for every stage of HR.

An HRMS built for every stage of your business. Share your details and we’ll set up a walkthrough built around your HR needs. 

Enter your Name. (Required)
Enter your Company Name. (Required)
Enter your Email ID. (Required)
Enter 10 digit Phone Number.
Checkboxes

We respect your privacy. Your details will only be used to connect you with relevant HR solutions. No Spam ever.

Contact us