India’s new labour codes came into force on 21 November, restructuring the country’s social-security framework. Gratuity, ESI, maternity benefits, and several retirement-linked provisions now operate under the Social Security Code, while the Code on Wages mandates a uniform 50 percent wage rule for statutory benefits.
But one major law has not moved: the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act) has not been repealed.
This creates an unusual compliance overlap—new wage definitions for most benefits, and an old definition for PF, both applying at the same time.
Why the two systems now clash
The Wage Code requires that basic pay + dearness allowance + retaining allowance form at least 50 percent of total remuneration. Any shortfall must be added back. This definition now anchors gratuity, ESI and leave-encashment calculations.
PF contributions, however, continue under Section 2(b) of the EPF Act, which uses a far narrower definition of “basic wages” and excludes HRA, bonus, overtime, commission and similar allowances. Until the EPF Act is formally repealed, companies must compute PF under this older framework.
The result:
One employee now has multiple wage bases—one for PF, another for gratuity and other benefits.
The 50% principle wasn’t new, but it was rarely enforced
The Supreme Court’s 2019 Vivekananda Vidyamandir ruling held that universally paid allowances must be included in PF wages. EPFO circulars also treated 50 percent of wages as a reasonable threshold. But because the EPF Act explicitly allowed many allowances to remain outside PF, most employers continued using lean basic structures.
Now, however, the 50 percent rule is compulsory for wage codes, forcing employers to redesign salary structures. As basic components rise to meet compliance norms, the PF base will naturally expand in practice—well before the law formally changes.
Tax implications add another layer of complexity
Moving allowances into basic pay may reduce tax efficiency, especially for employees using the old tax regime who rely on HRA, LTA and other exemptions.
To balance statutory compliance with tax optimisation, many organisations may:
- Retain existing allowances for tax purposes, but
- Add back allowances internally only for PF-wage calculation.
This creates a need for dual wage records—a tax-compliant salary sheet and a PF-computation wage sheet—supported by strict documentation and reconciliation to withstand PF audits.
Implications for stakeholders
For employers:
- Salary templates must be revised to comply with the 50 percent rule.
- Allowances may be retained for tax planning, but PF worksheets must show statutory add-backs.
- Payroll teams must prepare for dual-wage documentation and higher compliance scrutiny.
For employees:
- Take-home pay may reduce marginally as basic pay expands.
- PF and gratuity accruals will strengthen.
- Tax-regime choice should be revisited, especially for those relying on exemptions.
For policymakers:
The current dual system is not sustainable. Harmonising wage definitions and formally notifying the status of the EPF Act will be essential to prevent disputes and reduce litigation risk.
Bottom line
India is moving toward a unified wage architecture, but PF remains governed by an unrepealed law. Until alignment occurs, employers must navigate parallel regimes—one statutory framework for PF and another for all other benefits.
The reform is structurally sound, but its implementation now requires clarity, consistency and timely guidance.