Upcoming Changes to Salary Structure for Indian Employees in 2026
Significant Salary Adjustments Ahead
Beginning in April 2026, numerous salaried workers in India will experience modifications in their monthly earnings. Although the net pay may appear reduced, these adjustments are part of a larger initiative by the government aimed at enhancing the financial security of employees in the long run. These reforms were introduced through four labor codes by the Ministry of Labour and Employment, intending to modernize and simplify wage regulations by replacing outdated laws with a more coherent framework.
According to the new guidelines, the combination of basic pay, dearness allowance (DA), and retaining allowance must make up at least 50% of an employee's total remuneration. Components such as house rent allowance (HRA), bonuses, and special allowances are excluded from this calculation. However, if these excluded elements surpass half of the overall salary, the excess will be added back to the wages, effectively raising the base salary for many employees.
As several benefits are calculated based on this wage figure, the restructuring may lead to increased contributions to provident funds and insurance schemes. While this supports long-term savings, it could result in a decrease in immediate take-home pay due to higher deductions.
Inclusive Gratuity Regulations
One of the key changes involves gratuity eligibility. Fixed-term and contractual workers will now be eligible for gratuity after just one year of continuous service, a significant reduction from the previous five-year requirement. The government has confirmed that these provisions will take effect from November 21, 2025. Since gratuity calculations are based on the last drawn salary and duration of service, a higher basic salary will lead to a more substantial payout upon leaving the job.
Rishi Agrawal, CEO and co-founder of Teamlease Regtech, discussed the implications of these updates in a report. He noted, “Because gratuity is calculated based on the ‘last drawn wage’, this requirement effectively establishes a higher legal floor for the payout, increasing the employer's total liability.”
Impact on EPF Contributions
The revised wage structure will also influence contributions to the Employees’ Provident Fund (EPF). With a larger segment of the salary categorized as wages, both employer and employee contributions are expected to rise. Agrawal stated, “While this shift raises the long-term terminal benefits for the employee, it simultaneously increases the Defined Benefit Obligation (DBO) that companies must provision for on their balance sheets.” He added, “It also leads to a reduction in monthly take-home pay, as provident fund (PF) contributions, which are also tied to the wage base, increase alongside the gratuity base.”
However, for employers already contributing up to 12% of basic pay as per EPF regulations, the immediate impact may be minimal for some employees. In the short term, workers might notice a slight decrease in their disposable income. Nevertheless, these reforms are intended to bolster financial stability over time by enhancing retirement savings and social security benefits. Agrawal summarized, “The trade-off is between liquidity today and social security tomorrow.”