Indian companies must restructure compensation packages to ensure basic pay represents at least 50% of total CTC, leading to higher statutory costs and stricter settlement deadlines.
India has consolidated 29 labour statutes into four new Labour Codes, fundamentally changing how companies can structure employee compensation. Under the new rules, basic pay must represent at least 50% of total CTC, with any allowances above that threshold automatically reclassified as wages.
For years, Indian companies legally kept basic pay low at 20–30% of total compensation, using inflated allowances to minimise statutory contributions to Provident Fund and Gratuity schemes. This widespread practice allowed employers to reduce their statutory costs while remaining compliant with existing labour laws.
Companies with legacy payroll structures now face 5–15% increases in statutory costs as they adjust to the new wage base requirements. Additionally, the codes introduce a 48-hour deadline for final payroll settlements when employees leave, replacing the previous 30–45 day window and creating operational challenges for companies still using manual payroll processes.
How are EOR providers and their clients adapting their Indian payroll structures to meet these new requirements?
source: Papaya Global