Salary Structure Design: How to Split CTC the Right Way

A salary structure that looked smart two years ago — high allowances, low basic — now creates a direct compliance problem under the new Labour Codes.

Under the Code on Wages, 2019 (in force since 21 November 2025), basic pay must be at least 50% of total compensation. This single rule changes the effective cost of PF, gratuity, and overtime for any business that structured CTC with allowances above 50%.

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Quick Reference — How CTC Splits Under the New Rules

The Direct Cost Impact of Getting This Wrong

If your business currently has basic pay at 35% of CTC and special allowances at 65%, moving to 50% basic means: PF contributions (12% of basic, both sides) increase. Gratuity liability (calculated on last drawn basic) increases. Overtime pay (calculated on basic rate) increases. The total cost change depends on your headcount and current salary levels — but for businesses with large workforces or high headcounts, this is a real, quantifiable cost increase, not a paperwork exercise.

The EPF Scheme 2026 Change That Affects This Calculation

The EPF Scheme 2026 was notified on 2 July 2026, formally clarifying that mandatory PF contributions are capped at the statutory wage ceiling of ₹15,000 per month. This means the mandatory employer PF contribution is capped at ₹1,800/month, regardless of how high basic pay is set above that ceiling. Contributions above the ceiling are voluntary — both parties can agree to contribute on the full basic, but neither is legally required to. This changes the cost modeling for high-salary employees: above ₹15,000 basic, the 50% basic-pay rule from the Labour Codes and the ₹1,800 PF cap interact in ways that affect actual employer cost differently depending on the specific salary band.

⚠️ The EPF Scheme 2026 was notified only on 2 July 2026 — confirm current provisions directly at epfindia.gov.in before restructuring any salary, as detailed implementation guidance may still be developing.

The Special Allowance Problem That Hides in Plain Sight

The 2019 Supreme Court ruling (Vivekananda Vidyamandir case) established that allowances paid universally, necessarily, and ordinarily to all employees are part of basic wages for PF purposes — regardless of what they’re called in the salary structure. This means a “special allowance” paid to every employee without exception is not automatically excluded from PF. If your salary structure currently keeps basic low partly by funneling a large, uniform special allowance to all employees, that specific allowance may already be attracting PF under this ruling, whether or not it’s been treated that way so far.

A Reasonable Approach to Restructuring

1. Model the cost impact before communicating any change to employees. A 50% basic-pay structure increases gross PF and gratuity liability — quantify this by employee level first.
2. Check whether any existing allowances are paid universally to all employees. If so, they should already be included in PF-qualifying wages per the Supreme Court ruling.
3. Don’t restructure purely to minimize employer cost — build a structure that’s sustainable, compliant, and makes sense to employees who will see the change in their payslips.
4. Document the rationale for each component clearly. This helps in any future PF inspection or audit.

Frequently Asked Questions

Does the 50% basic pay rule apply to all employees, including part-time or contractual staff? The Code on Wages covers all workers as defined under the code — not just permanent employees. Confirm whether your specific contractual arrangements bring those workers under the Code’s definition before assuming they’re excluded.

If we can’t restructure immediately, is there a grace period? The Code on Wages came into force on 21 November 2025. There’s no blanket grace period published as of this writing — compliance is expected from the effective date. The absence of fully finalized state rules creates some transitional uncertainty, but treating the basic-pay requirement as already binding is the safer position.

Does HRA count toward the 50% allowance calculation? HRA is a statutory allowance excluded from basic wages for PF. It generally doesn’t count toward the 50% calculation the same way a special allowance would, but how the Code categorizes specific allowances for this threshold will become clearer as state rules finalize.

How does this interact with the new EPF Scheme 2026 mandatory cap? For employees earning above ₹15,000 basic, the 50% rule means higher basic, but the EPF Scheme 2026 caps mandatory PF contributions at ₹1,800/month on that basic. So the cost increase from restructuring isn’t as large as simply calculating 12% of the new higher basic figure for the entire workforce — it only fully applies for employees currently under the ₹15,000 basic ceiling.

References

• Code on Wages, 2019 (effective 21 November 2025)
• Employees’ Provident Funds Scheme, 2026 (notified 2 July 2026)
• Supreme Court judgment — Regional PF Commissioner v. Vivekananda Vidyamandir (28 February 2019) — on special allowances as basic wages
• Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 — Section 2(b)(ii) and Section 6

⚠️ The EPF Scheme 2026 was notified only 2 days before this post. Verify current provisions at epfindia.gov.in. State-level Labour Code rules are also still being finalized — position may evolve.

Last Updated: 08 July 2026

Reviewed By: TaxKitab Team

This connects directly to our post on New Labour Codes 2025 — the wage structure change covered here is the specific downstream impact of the broader Code on Wages reform.Call or WhatsApp: +91 7448200422 Email: info@taxkitab.comWebsite: taxkitab.com See our Payroll & HR Compliance service, or visit Contact.