The Centre’s new Labour Codes have come into effect at the start of this month, and a big concern for many is how this impacts your salary credits and in-effect taxation. The primary changes to salary structure are the focus shift towards long-term and retirement savings, for salaried individuals, but this means that your current in-hand pay may take some hit.
We asked experts about the key changes to your monthly pay cheques and whether this can change which tax regime you choose in the future.
Are the new labour laws a positive step for salaried taxpayers?
Puneet Gupta, Partner, People Advisory Services – Tax at EY India believes that the new labour codes are broadly aimed at “improving employee welfare by strengthening statutory benefits, standardising working conditions, and enhancing social security coverage”.
Jay Parmar, Co-founder and Partner at tax services firm Aurtus feels that the changes are positive in the long run. “While they may lead to a marginal reduction in monthly take home pay, they improve transparency and significantly strengthen retirement and social security benefits such as provident fund, pension, and gratuity. The short term impact is higher savings, not higher taxes, which ultimately enhances long term financial security,” he noted.
CA Chandni Anandan, Tax Expert at ClearTax also noted that the immediate impact on salary structuring is still evolving.
From a tax perspective, SureshKumar S, Partner at Deloitte India added that the new labour codes ensure wider and enhanced social security coverage for salaried taxpayer and helps them save even more on taxes.
What are the biggest changes brought by new labour laws?
Gupta noted that the among the most significant changes is the introduction of a common definition of “wages” across the labour codes. “This definition will be used to calculate several statutory benefits such as gratuity, leave encashment, Employees’ State Insurance, and statutory bonus. Under the new framework, wages include most components of salary, subject to specified exclusions and an overall cap of 50% on such exclusions. As a result, statutory payouts—particularly gratuity—may increase for many employees, as these benefits were earlier calculated on basic salary only,” he added.
Further, individuals who qualify as “workers” under the labour codes will be entitled to certain protections such as overtime wages, leave-related benefits, and retrenchment compensation, wherever applicable. “Overall, while the precise impact will vary by workforce structure and compensation design, the codes are intended to provide more predictable and enhanced statutory entitlements over time,” Gupta noted.
Do new labour laws provide tax deduction avenues?
Anandan noted that the new Labour Codes do not introduce any fresh income tax deductions under the Income Tax Act, 1961 (or the upcoming Income Tax Act, 2025). This means employees can continue to claim the same deductions and exemptions as before, including:
- Section 80C (investments in PPF, ELSS, life insurance, etc.)
- Section 80D (health insurance premiums)
- House Rent Allowance (HRA) exemption (available only under the old tax regime)
- Leave Travel Allowance (LTA)/Leave Travel Concession
- Other eligible allowances and perquisites under Section 10
Could changes to labour law impact your tax regime choice?
Not directly. Deductions and exemptions are governed by income‑tax laws, not by the labour codes, which focus on employment conditions, social security, and welfare benefits. “The labour codes do not, by themselves, introduce or modify income‑tax deductions or exemptions available to salaried taxpayers. Any tax benefit or deduction would flow from the Income‑tax Act and the rules notified under it, rather than from the labour codes,” Gupta stated.
Parmar added, “India’s new labour laws have altered salary structures and expanded social security coverage, they do not create new income tax deductions, they increase compulsory savings such as provident fund and pension contributions. These higher contributions would continue to enjoy tax benefits under existing income tax provisions.”
Proper tax planning imperative amid new labour laws. Here’s why
Anandan noted that the tighter definition of “wages” (where basic pay + Dearness Allowance + Retaining Allowance must form at least 50% of CTC) limits the room for tax-efficient allowances in the salary structure.
“Employers are restructuring CTCs by increasing the basic component, which may reduce the proportion of special allowances or reimbursements. This makes intentional tax planning even more important — focusing on available exemptions like HRA (with proper rent receipts) and optimising investments under the old regime or utilising the higher standard deduction in the new regime.
How do new labour laws affect in‑hand salary?
SureshKumar noted that the Labour code may not lead to any decrease in salary. “However, the net take home could dip where employees opt for enhanced retrial contributions and benefits in kind,” he added.
Parmar tried to contextualise the shift, noting that salary and compensations are not being cut, but restructured. “It only changes how salary components are structured. Any reduction in monthly in hand pay is largely due to higher statutory contributions. For employees, this translates into greater retirement savings, higher gratuity payouts, and improved long term financial security. Simply put, the new labour laws help secure future savings without any reduction in actual earnings,” he added.
Anandan concurred, that this shift is better viewed as a reallocation of compensation rather than a net cut. “More the salary is routed into protected, long‑term benefits, while the overall cost to the employer often remains comparable. For salaried taxpayers, the impact can be managed through smarter tax planning- leveraging investments under Sections 80C and 80D, optimising HRA and other eligible benefits, and using the new regime’s higher standard deduction- so that the tax outflow is optimized to the fullest extent,” she added.
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