The new Labour Code 2025 which came into effect on November 21, 2025, requires every employer to calculate wages as 50% of the total CTC for computing gratuity, pension and other social security benefits.
In a press release dated November 21, 2025, the government gave: “Uniform Definition of Wages: “Wages” now include basic pay, dearness allowance, and retaining allowance; 50% of the total remuneration (or such percentage as may be notified) shall be added back to compute wages, ensuring consistency in calculating gratuity, pension, and social security benefits.”
This new definition raises the question whether bonus and leave encashment components are to be included in the definition of wages or it is kept outside in the exclusion list.
According to Sumeet Hemkar, Partner, Deloitte India, the labour codes define the term ‘wages’ broadly and this definition also contains a specific list of exclusions, capped through a calculation mechanism.
Hemkar says: “This leaves the treatment of components and the respective amounts somewhat dynamic. While statutory bonus is included in wages, any discretionary bonus/incentive that is not part of the terms of employment is excluded.”
According to Hemkar, bonus/incentives are not specifically referred to, however, if these are in the nature of commission or discretionary bonus, then they are excluded, else they may be included.
According to Pooja Ramchandani, Partner, Shardul Amarchand Mangaldas & Co, Bonus and incentives fall under the exclusions part of the definition of wages if they do not form part of the terms of employment.
Also read: New Labour Law 2025 gratuity calculator: Here’s how gratuity on CTC of Rs 6 lakh, Rs 12 lakh and Rs 24 lakh will change
What about leave encashment? According to Ramchandani leave encashment is usually paid at the end of employment and thus by nature they are end of tenure payments and should be excluded.
However, the situation reverses if leave encashment is paid without end of employment. Ramchandani says: “…Where there is annual encashment like under the Labour Codes, leave encashment would be considered as wages.”
Hemkar says that leave encashment is also not specifically referred to, and while it appears to be included, however, a clarification from the Ministry of Labour & Employment is expected.
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Labour code 2025 has a cap on excluded allowances According to Hemkar, the labour codes also introduce a cap of 50% (or such percentage as prescribed by the appropriate government) on excluded allowances, meaning that if the specified excluded allowances exceed 50% of the total remuneration, the excess is required to be added back to ‘wages’.
Hemkar says: “This is to ensure a certain level of wages across employees. Because of this, the extent of exclusion of any component may vary from case to case and also depend on the salary structure.”
Ramchandani agrees with Hemkar and adds: “However, where all the exclusions taken together exceed 50% of the total remuneration, the amount which exceeds 50% will be considered as wages.”
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Bonus and leave encashment calculator after new Labour Code 2025 The table below has four scenarios depending on how much percentage of CTC is your bonus/incentive. We have taken a CTC of Rs 10 lakh to show the impact of before and after. The impact on leave encashment money is also shown.
In most of the scenarios, the bonus component is either going up or remaining the same, but the allowance component is decreasing in all cases since CTC is fixed.
Scene 1: Bonus is 10% of CTC Particulars Old – Bonus / incentive @ 10% of CTC New Labour code (INR) Increase / (decrease) compared to old Basic salary (35% existing and 50% new – of CTC) 3,50,000 5,00,000 1,50,000 Bonus/ incentive (assuming employer to adjust wages through other allowances and basic salary) 1,00,000 2,50,000 – Allowances (including employer PF) 5,50,000 2,50,000 (1,50,000); decrease Total CTC 10,00,000 10,00,000 – Employee PF (12% of basic salary) 42,000 60,000 18,000 Employer PF (12% of basic salary) 42,000 60,000 18,000 In hand salary (before tax) 9,16,000 8,80,000 (36,000); decrease Statutory benefits – PF 84,000 1,2
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