The 50% wage rule, plainly
Updated 21 October 2026
The Code on Wages, 2019 and the Code on Social Security, 2020 have been in force since 21 November 2025. Between them they give one definition of wages that PF, gratuity and bonus all follow. Most salary structures were designed before that definition applied.
What counts as wages
Wages are all remuneration, minus a closed list of things that are not wages. House rent allowance, conveyance, overtime, bonus and the employer’s own PF and gratuity contributions are on that list. Basic pay, dearness allowance and retaining allowance are not, and neither is special allowance. Anything not on the list counts.
The 50% test
If the excluded items come to more than half of total remuneration, the part above half is added back and treated as wages.
| Monthly pay | Amount |
|---|---|
| Basic | ₹20,000 |
| HRA, conveyance, LTA and other excluded allowances | ₹30,000 |
| Total remuneration | ₹50,000 |
Excluded items are 60% of pay. Half of remuneration is ₹25,000, so ₹5,000 is added back: wages for PF and gratuity become ₹25,000, not ₹20,000.
What it does to PF and gratuity
On those figures, employer PF at 12% goes from ₹2,400 to ₹3,000 a month, and the employee’s share rises by the same ₹600, which comes out of take-home. Gratuity, at 15/26 of a month’s wages for each year of service, goes from about ₹11,538 to ₹14,423 for every year worked.
Because gratuity is paid on wages at the time of leaving, the higher base applies to years already served, not only to years to come.
Passing the test is not the end of it
A structure can pass the 50% test and still calculate PF and gratuity on too little. If PF runs on basic alone while special allowance is part of pay, the base is below the wages the codes define, whichever side of 50% the structure sits.
If you restrict PF to the statutory wage ceiling, the cap moved from ₹15,000 to ₹25,000 on 17 September 2026, without any new option or form: the EPF Scheme 2026 caps contributions at the ceiling the government notifies from time to time. PF is then 12% of the lower of wages as the codes define them, 50% rule included, and ₹25,000. For September 2026 the ₹25,000 cap applies from 17 September only. If you already pay PF on full wages above the ceiling, you need not reduce it. See the PF wage ceiling article.
Questions
Does special allowance count as wages?
Yes. Wages are all remuneration minus a closed list of exclusions, and special allowance is not on that list.
Is exactly 50% a problem?
No. The excess is added back only when the excluded items come to more than half of remuneration.
Can basic salary be less than 50% of CTC?
Yes. The codes do not set a minimum basic. They test the excluded allowances against total remuneration: if those come to more than half, the excess counts as wages for PF and gratuity. A low basic is allowed; it no longer keeps PF and gratuity low.
Does this change what employees are paid?
Not their gross. It changes the base that PF and gratuity are calculated on, so employer cost can rise and take-home can fall by the employee's share of PF.