Video Summary - India's New Labour Codes Part 1: Expert session with Chartered Accountants and labour law specialist

Session purpose & timeline

Topic: India’s new Labour Codes (Part 1), with heavy focus on wage/salary structure implications for payroll compliance.
Key dates mentioned
- Acts notified: 21 Nov 2025
  - Government notified the Labour Code acts; rules were not fully notified immediately.
- Draft rules issued: Dec 2025 – Mar 2026
- Central rules officially notified: April 2026
- First month of full enforceable rules (central): April 2026
- Practical payroll deadline emphasized:
  - Restructure before April salary processing
  - Process April salary with the revised wage structure
  - November 2025 was also mentioned as needing consideration, but April was positioned as the main transition/implementation month.
Also addressed: Income Tax Act 2025 running in parallel—impacting salary design and take-home optimization.

Presenter(s) & source background (business roles)

Mr. Harsha Shri (Chartered Accountant; founder, Comply Solutions)
- 15+ years experience
- Works with startups/unicorns/MNCs on accounting & compliance
- Has worked with 30+ companies on labour code + compensation restructuring
Nikita (Razer Pay X)
- Product Marketing Manager for Razer Pay X payroll
- Hosted the webinar intro and set up the follow-up technical payroll session
Apurva (Razer Pay X)
- Product manager
- Covered product support/migration for payroll engine changes

Labour code scope: what changed at a “system level”

Consolidation into 4 codes (“Labour Board”)

Code on Wages (wages/bonus/minimum wage/payroll processing time limits)
Code on Social Security (PF, ESI, gratuity, etc.)
Code on Occupational Safety, Health & Working Conditions
- More generic coverage; applies widely with employee-threshold caveats
Industrial Relations Code
- Employer–employee relationship and unionization requirements at scale

Central + state rules both matter

The act is centralized, but rules can be central and state-specific.
This means you may need to consult both central and state rule status.
- Example referenced: Karnataka, where some areas were notified while others were still draft/partial.

Government enforcement stance

“Don’t wait for rules”
- Enforce from 21 Nov 2025 based on the act
- Adopt rule updates as they get notified
- If something is unclear, follow the old law (as explained in the session)

Regulatory simplification claims (operations/admin impacts)

The speaker referenced administrative reduction targets and “process simplification” metrics:

Central rules reduced: ~436 → 351
Returns reduced: 31 combined into a single electronic return concept
- Not fully ready; vision stated
Forms reduced: 181 → 73
Registers reduced: 84 registers → 8

New enforcement “mechanism” concepts

Compounding: instead of immediate penal/criminal action, regulator may allow a small penalty plus rectification.
Improvement Notice: inspector issues an improvement notice first; penalties escalate only if not corrected.

Core business playbook: wage definition changes (main operational focus)

Why it matters

Previously, PF/ESI/gratuity/bonus used different wage definitions, leading to inconsistent payroll computations and compliance risk.
The new labour code introduces a uniform “wages definition” used across gratuity, PF, ESI, bonus, etc.

Framework: “Inclusions / Exclusions / 50% condition / derived Wages”

This methodology is applied per employee salary structure:

Step 1 – Identify fixed components (“inclusions” base)
- Inclusions (examples): Basic, Dearness Allowance (DA), Retaining allowance
- Note: “includes” can trigger additional components depending on additional conditions.
Step 2 – Subtract exclusions
- Examples discussed included two exclusion categories (A & B):
- Exclusion A (examples):
  - statutory bonus
  - HRA/HA (as discussed)
  - conveyance allowance
  - accommodation value
  - employer contribution to PF (and related retirement-type items as listed)
  - NPS/pension-like items
  - overtime allowance
  - commission
  - utilities/medical facilities, etc.
- Exclusion B (examples):
  - gratuity
  - retrenchment benefits
  - ex-gratia
  - ESI (as described)
    - with an “ESI per FAQ” clarification
Step 3 – Apply the 50% condition
- Exclusions cannot exceed 50% of total fixed components.
- If exclusions exceed 50%, add back the difference.
Step 4 – Derived “wages” used for calculations
- Wages = Fixed components − Lower of:
  - (a) computed exclusions, or
  - (b) 50% of fixed components
- PF/ESI/gratuity are calculated on this derived wages, not on “just basic” or simplified headline assumptions.

Concrete example (operational calculation)

Monthly CTC/structured components: ₹60,000
Exclusions computed: ₹15,800
50% of fixed components: ₹30,000
Lower value: ₹15,800
Derived wages: ₹60,000 − ₹15,800 = ₹44,200
Result (as described): PF/ESI/gratuity computed on ₹44,200

Common payroll “misconceptions” corrected

Not safe: “Just take total salary × 50%”
- The speaker emphasized the outcome depends on how components are split because the exclusions vs 50% cap affects derived wages.
Special allowance must be handled explicitly
- FAQ position: include “special allowance” in inclusions (the naming doesn’t matter; what matters is statutory inclusion).
Variable pay cannot be used to “disguise” fixed wage
- If variable is genuinely performance-linked, exclude it.
- If variable is effectively fixed/disguised to reduce liability, regulator stance: treat it as fixed base for computations.

ESI / PF design implications (target & thresholds)

ESI eligibility threshold becomes wage-definition-based

ESI coverage threshold given: ₹21,000
Compare using wages derived per new definition, not gross salary.

Practical recommendation/position:

Restructure so that wages (per derived definition) keep employees above ₹21,000 where feasible—reducing unnecessary ESI contributions and improving take-home.

PF limits

No change stated on employer PF limits.
The existing option to compute PF on restricted basic (example: cap at ₹15,000 basic for PF purposes) continues (as explained).

Worker vs non-worker classification (organizational compliance playbook)

Framework

Classification must use labour definitions (not job titles):
- Workers: operational/manual/technical/operational/clerical/supervisory roles under certain salary/range constraints.
- Non-workers: managerial/administrative roles and/or those meeting exclusion criteria (simplified explanation: managerial/administrative and supervisors drawing over a mentioned threshold).

Operational consequences

For workers (mandatory coverage concepts):
- overtime pay rules apply
- leave & cashment/leave-related provisions apply
- union formation depends on worker count
For non-workers:
- overtime/leave benefits are more discretionary (framed as optional/negotiation power shift)

Concrete compliance principle

Core work cannot be outsourced
- Shifted from a narrower “industry-specific principle” to broader applicability: worker-core activities must not be routed through contract labor.

Overtime watch-out example

If someone works more than 8 hours/day, overtime applies even in a 4-day/12-hours/day workweek.
Result: overtime cost may increase if schedules exceed the daily threshold.

Other highlighted labour-code execution impacts (high level)

Gratuity

New rule stated: fixed-time workers eligible after 1 year (12 months)
- contrasted with earlier full-time style explanation, described as unchanged for full-time.
Gratuity calculation must use revised wage definition, not only “basic pay.”

Overtime / shift consent

Written employee consent needed for overtime and night shift.
Overtime pay described as 2× hourly wage (for workers).

Leave

Accrual: at least 1 day per 20 days worked
Carry forward cap: maximum 30 days
Cash settlement on unused leave (where applicable): based on wages (derived per new definition)

Facilities

Daycare center provision if workforce exceeds 50
Location constraint mentioned: within 1 km

Finance/ops governance: accounting & reporting actions

Recognize additional labour-code liabilities in financial statements.
- Example: during FY closing (example given: “2526”), recognize incremental gratuity/cost impacts in P&L.
Market consequence noted (illustrative): listed tech firms (e.g., Infosys, TCS) allegedly faced large gratuity liability impacts—primarily to highlight P&L risk.

Action checklist (immediate “April before payroll” playbook)

Immediate steps (before April salary processing):

Compute derived base wages using new inclusions/exclusions/50% wage definition.
Consider Income Tax Act 2025 impacts alongside labour-code changes.
Classify employees into workers vs non-workers.
Track overtime for workers (no longer limited by exemptions described).
Check state minimum wage compliance
- minimum wage varies by state and skill categories
- Karnataka examples referenced
Non-cash benefits limits
- Food/gift coupons/in-kind: keep under 15% of fixed pay (as stated), otherwise handle separately.
Re-check ESI enrollment using wage definition vs prior gross-rule-of-thumb.
Update gratuity approach for fixed-term employees leaving after 21 Nov 2025 (recalculate as needed).
Update appointment letters/employment agreements
- Include LIN (Labor Identification Number)
- Advised to wait until LIN availability before issuing revised documents
- Include growth path and required particulars per law
Update policies & notices/registers
- Replace old noticeboard content with new regulations
- Maintain registers under the new code

Additionally mentioned deadlines:

Salary payment timing: by 7th of the next month
FNF (final settlement): within 2 days from last working day
Stated compliance risk if missed

Product execution: how Razer Pay X supports implementation

Razer Pay X payroll capabilities mentioned

Support for wage definition configurations (component library)
Multiple salary templates/structures
Inclusion/exclusion component setup aligned to labour-code wage definition

Migration requirement

Existing accounts likely require backend migration to new payroll engine capabilities.
Form-based onboarding mentioned for customers to request migration for/around April payroll.

Planned follow-ups

Webinar on 21st (next Tuesday): live product walkthrough for creating salary templates and revising salary structures.

Key KPIs / numerical targets mentioned (mostly labour thresholds & compliance constraints)

Acts notification: 21 Nov 2025
First central rules enforceable month: April 2026
Uniform wage formula condition: exclusions limited to ≤ 50% of fixed components
ESI eligibility comparison threshold: ₹21,000 wages definition (not gross)
PF employer cost restriction option continues: PF can be computed by restricting basic (example: ₹15,000 basis)
Overtime triggers: workers eligible if > 8 hours/day
Overtime caps (central recommendation): 48 hours/week and 12 hours/day
Leave accrual: 1 day per 20 days worked
Leave carry forward cap: max 30 days
Food/gift coupon cap: ≤ 15% of fixed pay (as stated)
Daycare facility trigger & location: if employees > 50, within 1 km

Presenters / sources

Nikita — Product Marketing Manager, Razer Pay X Payroll (webinar host/intro)
Mr. Harsha Shri — Chartered Accountant; Founder, Comply Solutions (labour code expert)
Apurva — Product Manager, Razer Pay X (product/payroll engine & migration explanation)

India's New Labour Codes Part 1: Expert session with Chartered Accountants and labour law specialist

Key takeaways