What is Basic Salary under new code on wages for pension, EPF, and gratuity calculation? Explained

Under the Code on Wages, 2019, “basic salary” is part of the defined wages, which include basic pay, dearness allowance, and retaining allowance. Together, these three components should make up at least 50% of total remuneration.

Understanding your basic salary is essential, as it serves as the basis for calculating key social security benefits such as the Employees’ Provident Fund (EPF), gratuity, and pension.

“The term ‘wages’ under the code on wages is defined very broadly. It includes almost all types of remuneration (cash, allowances, or other payments), except for certain specific exclusions. Basic salary is specifically included. However, definition does ensure that the exclusions like HRA, travelling allowance, etc (other than exit-related payments like gratuity) cannot exceed 50% of total remuneration," said Divya Baweja, Partner, Deloitte India.

"Hence, only increasing the Basic salary to 50% will not be compliance enough under the codes. So, even if an employer does not increase Basic Salary, the ‘wage’ value would still be at least 50% of total remuneration, depending on the wage structure,” added Divya.

What counts as ‘wages’ under the 2019 Labour Code?

"Wages means all remuneration whether by way of salaries, allowances or otherwise, expressed in terms of money or capable of being so expressed which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment, and includes,—

(i) basic pay;

(ii) dearness allowance; and

(iii) retaining allowance, if any,

but does not include––

(a) any bonus payable under any law for the time being in force, which does not form part of the remuneration payable under the terms of employment;

(b) the value of any house-accommodation, or of the supply of light, water, medical attendance or other amenity or of any service excluded from the computation of wages by a general or special order of the appropriate Government;

(c) any contribution paid by the employer to any pension or provident fund, and the interest which may have accrued thereon;

(d) any conveyance allowance or the value of any travelling concession;

(e) any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment;

(f) house rent allowance;

(g) remuneration payable under any award or settlement between the parties or order of a court or Tribunal;

(h) any overtime allowance;

(i) any commission payable to the employee;

(j) any gratuity payable on the termination of employment;

(k) any retrenchment compensation or other retirement benefit payable to the employee or any ex gratia payment made to him on the termination of employment;

Provided that, for calculating the wages under this clause, if payments made by the employer to the employee under clauses (a) to (i) exceeds one-half, or such other per cent. as may be notified by the Central Government, of the all remuneration calculated under this clause, the amount which exceeds such one-half, or the per cent. so notified, shall be deemed as remuneration and shall be accordingly added to wages under this clause.

Provided further that for equal wages to all genders and for payment of wages, the emoluments specified in clauses (d), (f), (g) and (h) shall be taken for the computation of wages.

Explanation-Where an employee is given, instead of the whole or part of the wages payable to him, any remuneration in kind by his employer, the value of such remuneration in kind which does not exceed fifteen per cent. of the total wages payable to him, shall be deemed to form part of the wages of such employee."

What this means in simple terms

1. The Wage Code says your wage comprises of 3 components:

• Basic Pay

• Dearness Allowance (DA)

• Retaining Allowance

2. Many common salary payments do not count as wages

These items are excluded from wages:

• HRA

• Conveyance allowance

• Bonus

• Overtime

• Commission

• Employer PF contribution

• Gratuity

• Value of accommodation or utilities

• Retirement benefits/ex-gratia

These exclusions matter because PF, gratuity and bonus are calculated only on wages, not on CTC.

The 50% rule

Wages must be at least half of the total remuneration. The law says allowances cannot exceed 50% of total pay. If allowances exceed this limit, the extra amount must be reclassified as wages. This prevents employers from lowering basic and increasing allowances to reduce statutory payouts.

The 15% rule

The law states:

“If the employee receives remuneration in kind which does not exceed fifteen per cent of the total wages payable to him, the remuneration received in kind shall be considered while computing wage.”

This covers benefits such as: free meals, subsidised accommodation, free transport, uniforms, etc.

These benefits have a money value and must be counted as part of wages, but only up to 15%.

The four labour codes are: the Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020 and the Occupational Safety, Health and Working Conditions Code, 2020.