From the Knowledge Centre
PF and ESI under the Labour Codes: The New Wage Definition and What Employers Must Change
The four Labour Codes – on Wages, Industrial Relations, Social Security, and Occupational Safety, Health & Working Conditions – came into force on 21 November 2025. They replace 29 central labour laws. For most employers the change that hits payroll first is the uniform definition of "wages".
Who must register
| Scheme | Threshold |
|---|---|
| Provident Fund (EPFO) | Establishments employing 20 or more persons |
| Employees' State Insurance (ESIC) | Establishments employing 10 or more persons, in notified areas |
Once covered, an establishment stays covered even if employee numbers later fall below the threshold.
Contribution rates
| Employee | Employer | |
|---|---|---|
| Provident Fund (incl. EPS) | 12% of wages | 12% of wages (8.33% to EPS, subject to the wage ceiling) |
| ESI | 0.75% of gross wages | 3.25% of gross wages |
PF is compulsory for employees earning wages up to ₹15,000 per month. Beyond that, coverage is voluntary but common. ESI covers employees with gross wages up to ₹21,000 per month (₹25,000 for persons with disability).
The 50% wage rule
Under the Codes, "wages" means basic pay, dearness allowance and retaining allowance. Certain components are excluded, such as HRA, conveyance, overtime, commission and the employer's PF contribution. If the excluded components exceed 50% of total remuneration, the excess is added back to wages.
Many Indian salary structures keep basic pay at 30–40% of CTC and pay the rest as allowances. After the Codes:
- the PF base may rise for employees whose PF is calculated on actual wages
- gratuity is computed on the larger wage figure
- leave encashment, bonus and overtime calculations change
The cost increase depends on how the structure is designed. Some employers keep take-home pay constant by restructuring CTC. Others absorb the higher employer contribution.
Gratuity for fixed-term employees
Under the Code on Social Security, fixed-term employees become eligible for gratuity on a pro-rata basis after completing one year of service. Other employees still need five years of continuous service. Employers who rely on fixed-term contracts should provide for this liability in their accounts.
Monthly compliance
- Pay PF and ESI contributions and file the ECR by the 15th of the following month.
- Generate a UAN for every new joinee, and keep KYC (Aadhaar, bank, PAN) linked.
- Interest and damages apply to delayed payments. The employee's share deducted but not deposited is treated very seriously.
- Also, the employee's share of PF and ESI is deductible for the employer only if it is deposited by the due date under the respective law.
What to do now
- Run your current salary structures through the 50% test.
- Quantify the change in PF, gratuity and bonus cost.
- Update appointment letters and policies, especially for fixed-term staff.
- Track the state rules, which are being notified in stages.
The information in this article reflects the law as on the date of publication and is for general guidance only.