Govt Unveils Major Salary Overhaul: 50% Basic Pay Rule, New Tax Law And 4 Labour Codes To Reshape Payroll From 2026
**Govt Unveils Major Salary Overhaul: 50% Basic Pay Rule, New Tax Law And 4 Labour Codes To Reshape Payroll From 2026**
Businesses across India are gearing up for the most significant payroll and compliance changes in decades. With the implementation of four national labor codes in November 2025 and the new Income Tax Act 2025 coming into force on April 1, 2026, organizations need to act quickly to align their payroll systems. Experts warn that failing to comply could result in hefty penalties and legal complications.
The labor codes—Wage Code, Social Security Code, Industrial Relations Code, and Occupational Safety, Health, and Working Conditions Code—are already in effect, while the updated tax regime will replace laws that have been in place for nearly 60 years. This marks a transformative period for payroll management in India.
1. Minimum 50% Basic Salary Rule
Under the new wage code, an employee’s basic pay, including dearness allowance, must now account for at least 50% of their total CTC. This adjustment increases contributions to Provident Fund (PF), as EPF calculations will now be based on the higher basic pay. Changes in ESI eligibility limits mean more employees will fall under this coverage. Additionally, payouts for gratuity, overtime, and leave encashment will rise proportionally. Companies relying on low basic pay with high allowances will need to restructure salaries promptly to comply.
2. New Income Tax Act 2025
From April 1, 2026, the long-standing Income Tax Act 1961 will be replaced with the Income Tax Act 2025, requiring updates across all payroll processes. This includes recalculating TDS, revising reporting formats, and generating Forms 24Q and 16 in the new prescribed structure. Organizations must ensure their payroll systems are fully compatible with these changes to avoid compliance issues.
3. Two-Day Full and Final Settlement
One of the most employee-friendly reforms is the requirement for settling all pending dues within two working days of an employee’s exit. While this primarily affects the last month’s salary, employers are encouraged to expedite payments like gratuity and leave encashment as quickly as possible.
4. Digital Records Mandatory
Employers must now maintain all employee-related records digitally, covering salaries, attendance, PF/ESI contributions, payslips, and other registers. Authorities can access these records for real-time inspections, and failure to comply may lead to fines of up to ₹3 lakh, with repeated violations potentially attracting imprisonment.
5. Fixed-Term Employees Now Covered for Social Security
The new rules also extend statutory benefits to fixed-term employees, based on their tenure. Notably, gratuity eligibility has been reduced from five years to just one year of service, allowing even short-term employees to access this benefit.
Experts at P Square Consultancy emphasize that while many organizations focus on routine payroll costs, true foresight lies in anticipating the financial and reputational consequences of non-compliance. The reforms coming in 2026 make adherence not just a legal necessity, but a strategic imperative for businesses.
