The 50% Wage Rule
Redefining Indian Payroll.
Ameena Abdurahiman
Compliance SME • 12 min read
"For decades, Indian companies have optimized payroll by keeping basic salaries low and allowances high. The 2026 Code on Wages ends this practice, forcing a massive shift in how we define take-home pay."
What is the 50% Wage Rule?
The 50% Wage Rule is a statutory mandate under India's new Code on Wages that requires basic salary and core components to comprise at least 50% of an employee's total Cost to Company (CTC). This law effectively ends the practice of inflating tax-free allowances to reduce PF and gratuity liabilities, forcing organizations to restructure their payroll systems for 2026 compliance.
The Financial Impact
- Higher PF Contributions: Since Basic Pay increases, both employee and employer contributions to EPF will rise.
- Increased Gratuity Liability: Gratuity is calculated on 'last drawn wages.' A higher wage floor means higher payouts for long-term staff.
- Take-Home Shrinkage: With higher statutory deductions, the actual net salary in the employee's bank account may decrease slightly.
Legacy vs. 2026 Structure
Salary Structure Comparison
| Component | 2026 Wage Rule | Compliance Status |
|---|---|---|
| Basic Salary | Min 50% of CTC | Mandatory |
| Allowances (HRA, etc.) | Max 50% of CTC | Regulated |
| PF Contribution | Higher (Higher Basic) | Increased |
| Gratuity Accrual | Based on 50% Basic | Increased Liability |
Modeling the impact of the 50% rule on a standard Indian CTC.
Implementation Strategy
Transitioning to the new structure isn't just about changing numbers in a spreadsheet. It requires a clear communication plan for employees who may be confused by their lower take-home pay despite no change in CTC.
Simulate Early
Use Kiework's modeling tools to see how your entire budget shifts before the deadline.
Audit Accruals
Ensure your finance team has provisioned for the increased gratuity liability on the balance sheet.
Is your Payroll Engine ready for 2026?
Don't wait for the law to hit. Kiework's payroll system is pre-configured for the 50% Wage Rule and the 4 New Labor Codes.
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