One of the most important provisions under the new labour code which became effective last year for most salaried employees and workers is that the wages must account for 50% of the total CTC when calculating PF, bonus, gratuity upon retirement or in other specified situations but this does not include gratuity on termination, and other benefits. It’s important to note that this 50% rule excludes certain components like HRA, gratuity payable on termination, retrenchment compensation, and a few others.Additionally, the proviso to Section 2(y) states that if these exclusions exceed 50% of the total salary paid to an employee, then the amount exceeding 50% shall be deemed to be part of "wages".This article will clarify what components are excluded and how they affect your monthly net take home salary.What are the excluded components for the 50% wage rule under new labour codeExcluded components refer to those parts of the pay that won’t be used to determine 50% of your wages for calculating PF, gratuity and other benefits. This means your employer either has to increase your basic pay or allocate more money to other ‘included’ components to ensure that your wage makes up 50% of your CTC for these calculations.Sudhakar Sethuraman, Partner, Deloitte India, said to ET Wealth Online that Section 2(y) of the Code on Wages excludes specified components from the definition of "wages". The 50% test compares the aggregate value of the excluded items listed in clauses (a) to (i) against total remuneration.Clauses (j) and (k), namely gratuity payable on termination of employment and retrenchment compensation, are outside the scope of this test. Sethuraman explains what the exclusions listed in clauses (a) to (i) are:Statutory bonus payable under any law;Value of accommodation and the supply of light, water, medical attendance or other amenity;Employer's contribution to provident fund, pension or social security schemes;Conveyance allowance or travelling concession;Sums paid to defray special expenses entailed by the nature of employment;House Rent Allowance (HRA);Remuneration payable under an award or settlement between parties or in line with a court order;Overtime allowance; andCommission.Also read: Salary has to be paid before 7th day of the succeeding month under new labour code; Know what else the new labour code says about salary timelineThe Ministry of Labour and Employment FAQ No. 3 dated December 30, 2025 provides the following:"Performance-based incentives, Employee Stock Option Plans (ESOPs), variable part of the component or reimbursement-based payments to the employee shall not be part of the wages."Sethuraman says that if the FAQ is read literally, it suggests that reimbursement-based payments are excluded from "wages". However, the FAQ addresses what constitutes wages and does not specifically discuss whether reimbursements form part of the total remuneration that is used for applying the 50% test.Also, clause (e) of Section 2(y) clearly excludes, "any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment".Sethuraman suggests that one perspective is that reimbursements included in an employee's pay structure may still count towards the total remuneration for the 50% test. On the other hand, legitimate business expense reimbursements, like official travel expenses incurred and reimbursed on actual basis, could be excluded from the ambit of remuneration itself.However, this stance is not completely clear and could use some more regulatory clarification.How net take home salary can be affectedSome organisations have kept the basic pay the same but have increased the other components to comply with the 50% rule. Meanwhile, other companies have opted to increase the basic pay to 50% of CTC and adjust calculations accordingly. It’s a good idea to check with your HR department to find out what your company has done.A summary of the net impact on take home salary is as follows:CTC (in Rs)Net In-Hand (Old labour law)Net In-Hand (New labour code)Monthly ReductionRemark10 Lakh70,66765,3815,286Decreased take home Due to PF on inclusion15 Lakh106,00098,0727,928Decreased take home Due to PF on inclusion25 Lakh158,047146,46411,583Decreased take home Due to PF on inclusion50 Lakh277,949255,64322,305Decreased take home Due to PF on inclusionSource: Nangia & Co LLP (This calculation has assumed employer increased basic to comply with the 50% wage rule)Key impact on employeesAvneet Singh, Associate Partner, Nangia & Co LLP explained to ET Wealth Online that the revised salary structure is expected to have the following implications:Increase in Basic Pay as a proportion of total remuneration.Higher Provident Fund (PF) contributions by both employers and employees.Higher gratuity liability and corresponding provisioning by employers.Reduction in the proportion of salary paid as allowances.Lower monthly take-home salary for employees due to increased statutory deductions.Enhanced long-term retirement savings and social security benefits.Singh says the implementation of the new labour code is expected to have a short-term impact on employee liquidity while strengthening long-term financial security.Singh says: “Employees may experience a reduction in monthly take-home salary owing to higher provident fund contributions; however, this will be offset by enhanced retirement savings, a larger provident fund corpus, and increased gratuity benefits over the course of their employment.”Ultimately, the extent of the financial impact will depend on the organisation's existing salary structure, provident fund policy, and whether the additional statutory cost is absorbed by the employer or accommodated through a restructuring of the employee's overall CTC.Is there any change in tax-exempt reimbursements and allowances between old and new labour law?The labour codes do not determine the tax treatment of allowances, reimbursements or salary components. Taxability and exemptions continue to be governed by the Income-tax Act, 2025 and the Income-tax Rules, 2026.Labour codes regulate the wage base that is relevant for labour and social security benefits to employees / workers, including provident fund, gratuity, bonus, employee state insurance, etc. Consequently, Sethuraman points out a component may be taxable under the income-tax law and yet be excluded from wages under labour law, or vice versa.Therefore, the new labour code has altered the manner in which remuneration is evaluated for labour law purposes, particularly through the definition of wages and the 50% rule. It has not altered the tax treatment of salary components.Under the new tax regime, the following benefits continue to enjoy tax exemption or concessional tax treatment, subject to prescribed conditions and limits:1.Employer's NPS contributionUp to 14% of Basic Salary + Dearness Allowance for all employees, including employees in the private sector.2.Employer's Provident Fund contributionThis is tax-exempt subject to the overall annual threshold applicable to the aggregate of employer contributions to recognised PF, NPS and approved superannuation funds.3.Meal vouchers / food couponsExempt up to Rs 200 per meal, subject to prescribed conditions.4.Gratuity on retirement or terminationExempt up to the prescribed statutory limit of ₹20 lakh.5.Leave encashment at retirementExempt up to Rs 25 lakh for non-government employees.6.Official expense reimbursementsReimbursement of official mobile and telephone expenses and employer-provided vehicle facilities continue to receive tax treatment based on prescribed conditions and actual business usage.Under the old tax regime, exemptions are additionally available for:House Rent Allowance (HRA)Leave Travel Allowance (LTA)Children's Education AllowanceChildren's Hostel AllowanceOld tax regime allows deduction for expenditure on housing loan principal repayment and interest payments, tuition fees, insurance, Mediclaim, investment in specified bonds,Sodexo, child education, children’s hostel: Old vs New regimeBenefitOld regimeNew regimeRemarksFood couponsNot taxable up to Rs 200 per mealNot taxable up to Rs 200 per mealVouchers/ coupons non-transferable, usable only at eating joints, not encashable, during working hoursChildren Education AllowanceRs 3,000 per month per child up to two children is exempt from taxFully taxableChildren Hostel AllowanceRs 9,000 per month per child up to two children is exempt from taxFully taxableSource: DeloitteWorkings for CTC of Rs 15 lakh and Rs 50 lakhCTC 15 lakhNew labour codeComponentAnnualMonthlyPercentageTreatment in WagesBasic Salary6,00,00050,00040%InclusionHRA3,00,00025,00020%ExclusionSodexo Meal Card1,05,6008,8007%InclusionSpecial Allowance2,90,82924,23619%InclusionGross Earnings12,96,4291,08,036Employer PF1,19,5719,9648%ExclusionEmployer NPS84,0007,0006%ExclusionTotal CTC15,00,0001,25,000Inclusion9,96,42966%Exclusion5,03,57134%Total15,00,000100%Source: Nangia & Co LLPIncome tax calculation for CTC 15 lakhParticularsGross amountNet amountPF (annual)1,19,571Annual Gross12,96,429Standard Ded75,000Meal Exemption1,05,600Taxable Income11,15,829TDS51,58387 Rebate51,583Final Tax0Cess0Annual Tax0Gross Salary108,036PF (monthly)9,964Income tax-Net In Hand98,072CTC Rs 25 lakhNew labour codeComponentAnnualMonthlyPercentageTreatment in WagesBasic Salary10,00,00083,33340%InclusionHRA5,00,00041,66720%ExclusionSodexo Meal Card1,05,6008,8004%InclusionSpecial Allowance5,55,11446,26022%InclusionGross Earnings21,60,714180,06086%Employer PF1,99,28616,6078%ExclusionEmployer NPS1,40,00011,6676%ExclusionTotal CTC25,00,000208,333Inclusion16,60,71466%Exclusion8,39,28634%Total25,00,000Source: Nangia & Co LLPIncome tax calculation for Rs 25 lakh CTCParticularsGrossNetPF (annual)1,99,286Annual Gross21,60,714Standard Ded75,000Meal Exemption1,05,600Taxable Income19,80,114TDS1,96,02387 Rebate0Final Tax1,96,023Cess7,841Annual Tax2,03,864Gross Salary1,80,060PF (monthly)16,607Income tax16,989Net in hand1,46,464Source: Nangia & Co LLP