Labour codes and payroll in 2026: wage definition, settlements, overtime, bonus and what your software must change

The four labour codes (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) were brought into force on 21 November 2025, replacing 29 older labour laws. The Central Government then published its final central rules in May 2026 (the Industrial Relations, Wages, Social Security and OSH central rules are all dated 8 May 2026, G.S.R. 342(E) to 345(E), with the Gazette uploaded overnight into 9 May). For payroll, the main changes are a uniform definition of wages with a 50% rule, payment of full and final wages within two working days of an exit, overtime at not less than twice the normal rate, gratuity for fixed-term employees after one year, and new prescribed registers and wage slips. Your payroll software must apply all of these, and state-specific rules on top.

This guide sits under the payroll and HR software comparison overview. It is general information; restructure salaries only with professional advice.

What came into force when

Many states have published their own rules; others are at different stages. Where a state is the appropriate government (most private establishments), its rules on forms, minimum wages, registers and returns apply. Check your state labour department and the Ministry of Labour and Employment.

The uniform definition of wages and the 50% rule

Under the Code on Wages, "wages" broadly means basic pay, dearness allowance and retaining allowance. Several components are excluded (such as HRA, conveyance, overtime, commission, statutory bonus and employer contributions to PF). The key proviso: if the excluded components together exceed 50% of total remuneration, the excess is added back to wages. The Code on Social Security uses the same definition, so it flows into PF, gratuity and other benefits.

Illustrative example.

Half of total remuneration = ₹20,000. Excluded components = ₹28,000, which exceed half by ₹8,000. Wages for code purposes = ₹12,000 + ₹8,000 = ₹20,000. Employee PF at 12% rises from ₹1,440 (on ₹12,000) to ₹2,400 (on ₹20,000), and gratuity will later be calculated on the higher wage. Total CTC need not change, but take-home pay can.

Your software should calculate this test automatically for each employee each month, show the add-back as a separate line and let you see the effect on PF, ESI and gratuity provisions. Ask the vendor to run this case in the demo. Which allowances count as excluded depends on the definition and your structure; confirm with your adviser.

Payment timelines and full and final settlement

The Code on Wages sets time limits for wage payment. For monthly-rated employees, wages are due before the end of the seventh day of the following month. When an employee is removed, dismissed, retrenched or resigns, or becomes unemployed due to closure, wages due must be paid within two working days. The older law did not expressly include resignation, so many businesses that took 30–45 days for full and final settlement now have to speed up.

Gratuity and bonus run on their own timelines and are not "wages" under the definition, but payroll still has to compute them quickly. Your software should be able to process an off-cycle settlement: salary to the last working day, leave encashment, notice pay recovery or payment, and deductions, the same or next day. See gratuity, bonus and leave encashment sums.

Overtime, working hours and minimum wages

Under the central rules of May 2026:

• overtime is paid at not less than twice the normal rate of wages;
• normal hours are up to 8 a day for daily-rated workers and up to 48 a week;
• overtime is capped: the OSH (Central) Rules allow no more than 144 overtime hours in a quarter; states may set different limits;
• a daily minimum wage converts to an hourly rate by dividing by 8 and to a monthly rate by multiplying by 26.

Illustrative example. A worker's daily wage is ₹520. Hourly rate = ₹520 ÷ 8 = ₹65. Overtime rate = 2 × ₹65 = ₹130. Ten overtime hours in a month = ₹1,300. Payroll needs attendance data at hour level and an alert as cumulative overtime approaches the quarterly cap.

A national floor wage is provided for in the Code; the method is prescribed but the amounts were reported as not yet notified. Minimum wages remain fixed by the appropriate government, so your software must hold the rates for each state, zone and skill category.

Bonus and gratuity

• Bonus: the Centre has notified eligibility for employees drawing wages up to ₹21,000 a month with at least 30 days' work in the year, and calculation as if wages were ₹7,000 or the minimum wage, whichever is higher. The bonus range remains 8.33% to 20% of the calculation base, subject to allocable surplus. States may notify their own figures for their establishments.
• Gratuity: still 15 days' wages for each completed year (15/26 of monthly wages for monthly-rated staff) after five years of continuous service, but fixed-term employees qualify after one year under the Code on Social Security. The ceiling of ₹20 lakh continued to be reported as the statutory limit in 2026.

Worked sums are in gratuity, bonus and leave encashment calculations.

Registers, wage slips and other records

The central rules under the Code on Wages prescribe forms such as an employee register, a register of wages, overtime, advances, fines and deductions, a wage slip, and an attendance register cum muster roll (Forms I, IV, V and IX under rules 51 and 52 of the Code on Wages (Central) Rules, 2026). States prescribe their own versions. The OSH Code also requires an appointment letter for employees. See statutory registers, payslips and self-service.

What to change in your payroll setup

1. Run the 50% test across all salary structures and review them with your adviser.
2. Configure the 2-working-day settlement workflow and an off-cycle run.
3. Update overtime rates, caps and attendance capture.
4. Update bonus eligibility and calculation bases.
5. Enable gratuity provisioning for fixed-term employees from one year.
6. Switch registers and wage slips to the formats your state prescribes.
7. Update EPF for the ₹25,000 ceiling from 17 September 2026.

The selection checklist includes these as test items.

Frequently asked questions

Have the old labour Acts stopped applying?

The codes repealed and subsumed them from 21 November 2025, with transition provisions. Schemes and procedures continue until replaced, as the EPF Scheme, 2026 shows. For a specific obligation, check the code, the rules of your appropriate government and any official FAQs.

Does the 50% rule mean basic must be half of CTC?

Not exactly. It caps exclusions: if excluded components exceed half of total remuneration, the excess counts as wages. Structures can comply in different ways; get advice before changing them.

Do the two-day settlement rules apply to gratuity?

Gratuity is not wages under the definition and has its own timeline. Wages due on exit must be paid within two working days.

Are state rules the same as the central rules?

No. States are the appropriate government for most private establishments and issue their own rules and forms.

Sources

• Ministry of Labour and Employment — the four codes, central rules and FAQs
• e-Gazette of India — notifications of commencement, rules and bonus orders
• EPFO — EPF Scheme, 2026 and contribution rules
• ESIC — ESI under the Code on Social Security
• India Code — text of the codes