Income tax savings under the new labour codes 2025: What you need to know

The new labour codes 2025 do not directly introduce new income tax-saving deductions. Instead, they boost tax savings by mandating a change in your salary structure, which automatically increases your contributions to tax-exempt retirement instruments like the Provident Fund (PF).

The main change and its tax implications are driven by the Code on Wages, 2019, and its definition of "wages."

What the labour codes change about your salary /"wages"

Under the new labour codes, the definition of “wages” has been standardised: Basic pay plus Dearness Allowance (DA) plus retaining allowance (if any) together must constitute at least 50% of total remuneration (CTC / salary package).

To cut it short, more of your salary moves into “wage”, raising PF/pension/gratuity contributions and long-term benefits, but likely reducing monthly take-home pay.

"One major benefit for the employees in the private sector will be that they will be able to accumulate a large retirement corpus under NPS/PF. Moreover, these employees will be eligible for a lower home loan as the home loan eligibility is considered on the in-hand salary," Jain added.

How can the new labour codes can boost your tax savings under new tax regimes?

The new tax regime offers lower slab rates, a higher rebate threshold, but fewer exemptions/deductions compared to the old regime.

Under the new regime, one available deduction is from employer contributions to pension/fund (e.g. PF/pension/social security).

Since PF/pension contribution amounts will rise (because of higher “basic/wages” base). That means you get a bigger deduction even under the new regime, reducing taxable income.

"Employees will be able to save more income tax every year because of a higher component of the employer’s contribution to the provident fund, which does not form part of the employee’s salary. Since the employer and employee both are contributing higher amounts to EPF, part of which goes to EPS, he will get a larger amount as retirement corpus from EPF as well as a higher pension from EPFO," added Balwant Jain.

How the new labour codes can boost your tax savings under old tax regimes?

Under the old tax regime, taxpayers depend heavily on exemptions and deductions, such as HRA, LTA, Section 80C, 80D and various allowances, to reduce their taxable income.

However, with the new wage definition increasing the share of basic salary, some tax-saving potential from these allowances and deductions may be reduced

“In the old tax regime, HRA exemption, typically 50% of basic salary, significantly reduces tax liability. When basic pay rises due to the new wage definition, HRA eligibility will also increase. For high-income individuals living in expensive rental markets like prime areas of Mumbai, where rents can be ₹5–6 lakh a month, this higher HRA exemption becomes especially advantageous. Such taxpayers should prefer the old tax regime,” advised Jain.

Employers can contribute up to 14% of an employee’s basic salary to the National Pension System (NPS) in new tax regime. Employer contributions up to 12% of basic salary to the Provident Fund (PF) are tax-exempt, subject to a combined PF and NPS contribution cap of ₹7.5 lakh per year. Contributions beyond this limit are taxable under the new tax regime.

Since Budget 2021, interest earned on an employee’s contribution to an EPF account exceeding ₹2.5 lakh in a financial year is taxable in the employee’s hands and is subject to TDS. This threshold includes contributions to the Voluntary Provident Fund (VPF).