New Labour Code: How Work Rules Will Change From April 1?

New Delhi: As the new financial year 2026-2027 (FY27) starts from next month, i.e. April 1, major changes are afoot for millions of private sector employees. The new Income Tax Act, 2025 and the New Labour Code announced by the government are about to officially come into effect. These changes will directly impact the salary, PF contributions, and retirement funds.

What is the new labour code?

The government has simplified decades-old labour laws and consolidated them into four major codes: the Code on Wages, the Code on Social Security, the Industrial Relations Code, and the Occupational Safety, Health and Working Conditions Code. 

The primary objective of these reforms is to streamline India's regulatory architecture into a simpler, unified system.

How will your salary structure change?

The biggest change under the new rules will be in the salary structure. Now, an employee's basic salary will be mandatory to be at least 50 per cent of their total salary. Previously, companies have kept their basic salary low and allowances (HRA, special allowances) at 70-80 per cent to save tax. However, starting April 1, allowances will not exceed 50 per cent of the total salary.

When your basic salary increases, it will directly impact deductions that are a percentage of your basic salary. Provident Fund (PF) and gratuity calculations are based on your basic salary. For example, if the CTC is Rs 50,000 and the current basic salary is only Rs 15,000, the PF contribution is deducted on that Rs 15,000. However, with the new rule, your company will have to increase your basic salary to at least Rs 25,000. 

As the basic salary increases, both the  PF contribution and the company's contribution will increase. As a result, the cash salary will decrease, but the PF account will grow faster.

What about the gratuity?

Gratuity is also based on basic salary, which will significantly increase the lump sum amount received upon leaving or retiring. Contract or fixed-term employees will no longer have to wait five years for gratuity. They will be eligible for it even after just one year of service.

What are the changes in the income tax?

The new salary structure may also impact tax liability. Since the HRA (house rent allowance) exemption is determined based on the basic salary, an increase in the basic salary may alter the tax exemption calculation. Those who chose the old tax regime may have to re-evaluate their tax planning. 

Are there new working hours?

Regarding working hours, the new code mandates a total of 48 hours per week. If an employee works more than the prescribed hours, the company must pay double overtime. 

Additionally, the rules for full and final settlement have been tightened. Now, companies must settle an employee's full account within two days of resignation or termination, up from 45 days previously.