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Code on Wages: All You Need to Know in 2026

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Another financial year begins in India, and a few changes are already taking place. The government implemented the four new labour laws in November 2025. The Code on Wages, 2019, is one of those four new labour laws.

The wage code, 2019, regulates how you pay wages to employees and which components are part of the minimum wage. It also specifies payment modes and penalties for non-compliance. Additionally, the government notified the Code on Wages Draft Rules in December 2025, clarifying aspects related to calculating and fixing minimum wages.

This guide covers everything you need to know to comply with the wage code in 2026.

What is Code on Wages?

As one of the four new labour laws, the Code on Wages, 2019, replaces old minimum wages and compensation-related acts. Earlier, the four laws often contradicted each other and confused employers. Additionally, these laws left 80% of the workforce uncovered, as the old laws provided only minimum wages for full-time and, to an extent, part-time employees.

In effect, the old laws excluded contractual workers and employees working in the unorganized sector. Lastly, the Payment of Wages Act, 1936, only applied to workers earning less than ₹24,000.

What are the Draft Code on Wages Rules: 2025

The central government notified the Draft Code on Wages Rules, 2025, for operationalizing the COW. The rules clarify details such as the daily wage formula, criteria for fixing minimum wages, and the calculation of overtime.

Which Laws does the Code on Wages Replace?

Section 69 of the Code on Wages replaces four laws –

• The Payment of Wages Act, 1936,
• The Minimum Wages Act, 1948,
• The Payment of Bonus Act, 1965, and
• The Equal Remuneration Act, 1976

Here is a table showing what the old laws were, what they covered, and how they offered limited coverage compared to the new code.

What Changed under the Code on Wages?

The COW brought many changes, including minimum wages for more employees and a national floor wage. Here is a table that briefly discusses these new changes by comparing them with earlier provisions.

Key Definitions under the Code on Wages

The code on wages clarifies several key terms, including –

• Wages,
• National floor wage,
• Minimum wage,
• Wage period, and
• Specific deadlines for the time of payment.

Now, let’s explore all these terms and components in detail.

1. What Counts as “Wages” under the New Law? (the 50% Rule)

Section 3 of COW specifies basic pay, dearness allowance, and retaining allowance as core components of wages. If excluded allowances exceed the 50% threshold, the excess is automatically added back to the wage base for PF and gratuity calculations. Here’s a table that will clarify which components are counted and which are excluded under the 50% rule.

*Note: As per the Draft consolidated wage Rules, medical reimbursements like creche allowances and telecommute costs are not included in the gratuity calculation. Also, according to section 2(Y) of the code, non-cash benefits such as house rent allowance are counted as part of the minimum wage only up to 15%.

2. National Floor Wage vs. Minimum Wage: What’s the Difference?

The Code establishes a two-tier wage system to ensure a baseline standard of living across all states.

National Floor Wage

Under section 9 of the code, the central government sets national floor wages. Under rule 11 of draft COW rules, the national floor wage is calculated based on a family of four consumption units (2,700 calories/adult, clothing, and housing). No state government may set a minimum wage below the national floor wage threshold.

Minimum Wage

Set by the state government, this is the rate at which an employer must pay an employee. For minimum wages:

• Revision: The VDA is adjusted twice a year (April 1 and October 1) based on the Consumer Price Index (Rule 5).
• Formula: Minimum Wage = Basic Wage + Variable Dearness Allowance (VDA)
• Formula for daily wage: Daily Minimum Wage = Monthly Minimum Wage ÷ 26 working days
• Daily Conversion: Monthly Minimum Wage 26 working days (Rule 3(2)).

3. What is the Wage Period?

As per section 16 of COW, the wage period can be daily, weekly, fortnightly, or monthly. However, the gap between paydays should not exceed one month.

4. Payment Timelines

The Code removes previous distinctions based on establishment size, enforcing a uniform schedule for all employers. Section 17 is important here as –

• It specifies that monthly salaries must be paid by the seventh of the following month.
• Under section 17(2), full and final settlement dues must be paid within two working days.

How does the Code on Wages Affect Your Payroll?

The code on wages changes three things that you should know from a payroll compliance perspective:

Changes in Salary Structure

To comply with the Section 2(y) 50% rule, ensure that Basic Pay + DA constitutes at least 50% of the total remuneration.

Higher PF, ESI, and Gratuity

The 50% wage rule directly increases your statutory costs. Since Section 2(y) requires the “Wage” base to be at least half of the total CTC, the components calculated as a percentage of that base, specifically PF (12% of wages) and gratuity will rise proportionally, increasing the employer’s total contribution.

Timely Wage Payment Mandatory

Section 17 removes the old rules that varied by company size and requires all establishments to pay monthly wages by the 7th of the following month.

Who does the Code on Wages Cover?

The wage code covers all employees in India, including contract, fixed-term, gig, platform, part-time, and daily-wage workers.

• Full-time workers: Under Section 2(k), regular staff receive full protection. This includes the 50% wage base rule and mandatory payment by the 7th of the month(e.g., HR Executive, Accountant, Software Engineer).
• Contract Workers: Section 2(l) defines contractors as employers. This ensures that contract staff receive the legal minimum wage and a 2-working-day exit settlement under Section 17(2) (e.g., housekeeping staff, security guards hired via agencies).
• Fixed-term Workers: These employees hold the same rights as permanent staff for the length of their contract. Benefits are pro rata, and the Section 2(y) wage definitions apply in full (e.g., 6-month contract developer, project-based HR consultant).
• Gig Workers: If a “hire or reward” relationship exists under Section 2(k), the Code applies. This secures their right to minimum wages and prevents illegal pay deductions (e.g., Swiggy, Zomato delivery partners).
• Platform Workers: When classified as employees within an establishment, these workers are entitled to timely payment. This shift helps formalize digital and freelance work (e.g., Upwork, Fiverr freelancers working regularly for one company).
• Part-time Workers: Section 6 ensures these workers receive the hourly or daily equivalent of the official minimum wage. The law does not waive pay standards for shorter hours (e.g., part-time office assistant, retail store helper).
• Daily Wage Workers: Rule 3(2) of the 2025 Draft Rules sets the formula: Monthly Minimum Wage / 26 days. This division accounts for the mandatory weekly rest day (e.g., construction workers, daily labourers).

Impact on Employers and Employees

The wage code 2019 affects how you calculate and pay employees’ salaries. It also offers more protection to employees.

For Employers

• Budgeting for the 50% Rule: Restructuring salaries to meet the Section 2(y) wage cap will increase your PF, gratuity, and ESI costs.
• Payroll Policy: Reconfigure your payroll policies to comply with the “7th of the following month” deadline.
• Wage Rights: Section 60 makes any internal agreement where an employee waives their wage rights completely void, regardless of an employee’s consent.
• Equal Pay Compliance: Employers must ensure equal remuneration for the same or similar work, irrespective of gender.

For Employees

• Universal Minimum Wage: regardless of your establishment or employment type, you are entitled to minimum wage.
• Improved Financial Security: higher PF and ESI would help you in the future.
• Faster F&F settlement: You will receive your final settlement payments within two working days after your resignation.
• Gender Neutral Pay: Section 3 strictly prohibits pay discrimination based on gender for the same or similar work. This specifically includes protections for transgender employees to ensure fairness.
• Extended Claims Window: The timeframe for filing a wage claim has been extended to 3 years. This gives you more time to identify and resolve pay disputes.

Penalties for Non-Compliance

Section 54 of the wage code specifies the penalties for non-compliance. Read the table below to understand more about the specific provisions.

Compliance Checklist for HR Teams: Comply with Code on Wages

Here are some factors you must include on your checklist to comply with the new wage code.

• Fix Basic and DA at 50% of CTC to cap excluded allowances
• Apply Section 2(y) wage definitions for PF and ESI base calculations
• Pay the higher rate between the state minimums and the national floor wage
• Set calendar alerts for VDA revisions in April and October
• Finalize monthly payroll by the 7th and clear F&F settlement payments within two days
• Refer to Social Security Code rules for specific gratuity exclusions and timelines
• Issue appointment letters and ensure equal pay for all contract staff
• Grant fixed-term employees gratuity eligibility after one year of service
• Pay double for overtime and monitor the 144-hour quarterly limit
• Comply with creche requirements.
• Brief your payroll team on the new labour laws.

How factoHR Helps in Complying with Code on Wages and Other Regulations

Managing payroll across multiple states involves tracking different minimum wage schedules, VDA revisions, and strict payment deadlines. A single error in a wage base or a missed deadline can quickly lead to a Section 54 notice.

As a cloud-based HRMS and payroll solution – factoHR is built to handle these requirements directly. It identifies non-compliant salary structures before they are finalized, ensuring PF and gratuity are calculated on the correct basis. The system also tracks state-specific minimum wage updates and automates exit workflows to meet the two-working-day settlement rule.

FAQs

What is the Current National Floor Wage in India?

As of April 2026, the Central Government has not fixed a specific National Floor Wage. Until an official rate is notified, individual states continue to set and enforce their own minimum wage schedules and VDA revisions independently.

What is the 50% Rule under the Code on Wages?

Section 2(y) mandates that “wages” must be at least 50% of the total remuneration. If allowances exceed half of the salary, the excess is added back to the base salary, thereby increasing the employer’s statutory contributions for PF and gratuity.

Does the Code on Wages Apply to Gig Workers?

Yes, if a “hire or reward” relationship exists under Section 2(k). While the Social Security Code of 2020 formally defines them, the Wage Code ensures they receive the legal minimum wage and are protected from unauthorized or illegal salary deductions.

When are Minimum Wages Revised under the New Wage Code?

Under Section 8, the Government must review and revise minimum rates at least every five years. Additionally, Variable Dearness Allowance (VDA) is typically adjusted twice a year to align worker earnings with the current cost of living.

What is the Difference between Floor Wage and Minimum Wage?

The Floor Wage is a national baseline set by the Center. Specific State Governments fix Minimum Wages. States can set their rates above the national floor, but they are legally prohibited from setting them below it.

When did the Code on Wages Come into Effect?

The Code on Wages was passed in 2019, but its nationwide implementation was aligned with the other three labor codes. Following extensive state-level rule-making, the unified framework became fully operational across India starting from the 2025-26 cycle.

Is Code on Wages Implemented in 2026?

Yes. Following the final notification of the 2025 Central and State Rules, the Code is now active. Establishments must comply with the 50% wage rule, 7th-of-the-month pay deadlines, and the mandatory two-working-day final settlement rule for all exits.

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