How your salary and benefits may change with labour codes and income tax reforms – explained
Times of India
by PUNEET GUPTAFebruary 26, 2026
AI-Generated Deep Dive Summary
India’s salary and benefits structure is set to undergo significant changes with the implementation of four new labor codes and updated income-tax rules. These reforms aim to modernize how wages, benefits, and social security are managed, creating a more uniform and transparent system. Starting November 21, 2025, employers will need to align their compensation strategies with these changes, which include a standardized definition of “wages” across all labor codes. This shift is expected to strengthen the connection between earnings, statutory benefits, and long-term social security.
Traditionally, India’s Cost-to-Company (CTC) model has fragmented salaries into basic pay, allowances, and tax-exempt components like house rent allowance (HRA) and conveyance allowance. While this approach optimized short-term take-home pay for employees, it also limited statutory contributions such as provident fund and gratuity to a smaller base of earnings. The new labor codes aim to reduce this fragmentation by introducing a structural threshold: any salary component excluded from wages cannot exceed 50% of total remuneration. This ensures that social security contributions are calculated on a more representative earnings base.
The reforms also align with revised income-tax exemption limits, allowing employees to claim higher tax exemptions on select allowances and benefits. However, employers must carefully balance these changes with the updated tax rules while evaluating their impact on compensation costs, benefits, and overall competitiveness. The interplay between the new wage definitions and tax policies will require organizations to reassess how they structure pay packages.
These changes matter globally as India’s labor reforms could set a precedent for other developing economies. By standardizing wages and enhancing social security contributions, the reforms aim to create a more equitable and sustainable compensation system. For employees, this
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Originally published on Times of India on 2/26/2026