If you employ people in India, or you are about to, the ground moved under you in the last nine months and it is still settling.
On 21 November 2025 the Government of India brought all four Labour Codes into force at once, replacing 29 central labour statutes that had governed Indian workplaces since the 1940s. The Central Rules that make those Codes operational were notified on 8 May 2026. State rules are arriving unevenly, which means the law that applies to your engineer in Bengaluru is not yet identical to the law that applies to your analyst in Pune.
For a US or European company running a small India team, this is not an abstract policy story. It changes your payroll cost, your contracts, your exit liabilities and your audit exposure, and most of it lands whether or not anyone told you about it.
Here is a practical read of what changed, what it costs, and what to do next.
The two-stage answer to “when does this take effect”
People keep asking for a single date and there is not one. Labour is a concurrent subject in India, meaning both the Centre and the states make rules. The sequence runs like this.
| Stage | What happened | Date |
|---|---|---|
| Codes notified | All four Codes brought into force, 29 legacy statutes repealed | 21 November 2025 |
| Draft Central Rules | Published for stakeholder comment | 30 December 2025 |
| Final Central Rules | Code on Wages, Social Security, OSH and Industrial Relations Rules notified | 8 May 2026 |
| State rules | Rolling. Several states have notified final rules, several large industrial states are still in draft | Ongoing through 2026 |
The practical consequence: the Codes are law everywhere, but the operational detail your payroll team needs depends on which state your employee sits in. Companies with people spread across four or five states are effectively running four or five compliance timelines at once. That is the part most foreign employers underestimate.
The change that costs you money: the 50 percent wage rule
This is the one to understand if you read nothing else.
Indian salary structures have historically kept basic pay low, often 25 to 35 percent of total package, and loaded the rest into house rent allowance, special allowance, conveyance and so on. Because Provident Fund, gratuity and bonus were all calculated on the narrow “basic” figure, this kept statutory cost down. It was legal, it was universal, and it is now closed.
Under the Code on Wages, wages means basic plus dearness allowance plus retaining allowance, and the excluded allowances cannot exceed 50 percent of total remuneration. If they do, the excess is deemed to be wages and pulled back into the base for statutory calculations.
What that does to a package:
| Component | Old structure | Restructured to the 50 percent rule |
|---|---|---|
| Total package | Rs 100,000 | Rs 100,000 |
| Basic (wages) | Rs 30,000 | Rs 50,000 |
| Allowances | Rs 70,000 | Rs 50,000 |
| PF base | Rs 30,000 | Rs 50,000 |
| Gratuity accrual base | Rs 30,000 | Rs 50,000 |
Same headline number, materially different statutory cost. Reported impacts vary with how aggressive the old structure was, but employer manpower cost increases in the range of 5 to 15 percent are commonly cited, with gratuity exit payouts rising considerably more because the accrual base has grown.
Two knock-on effects worth planning for:
Employee take-home falls if you hold the package constant. A higher wage base means a higher employee PF deduction. The employee’s total compensation has not changed and their retirement corpus has grown, but the number landing in their account each month is smaller. If you do not explain this before the first restructured payslip, you will spend the following week explaining it badly.
You have a decision to make. Hold total package constant and let take-home drop, or gross up and absorb the cost yourself. There is no compliant third option. For teams competing for scarce engineering talent, most employers we work with have chosen to gross up at least partially, because a silent pay cut is an expensive way to save money.
Fixed-term employees now accrue gratuity from year one
Under the Code on Social Security, fixed-term employees qualify for gratuity after one year of continuous service. Permanent employees still carry the familiar five-year threshold.
If your India model relies on project-based or fixed-term hiring, this is a new liability that starts accruing from month one rather than never materialising because people rarely stayed five years. It needs to sit in your provisioning, not just in a footnote.
Appointment letters are now mandatory
Every employee must receive a formal appointment letter, in the format the Rules prescribe. This sounds administrative and is not. For foreign employers it is the document that will be pulled first in any inspection, and the one that determines whether your working arrangement matches your paperwork.
If you inherited an India team through an acquisition, or you have people who started under a consultancy agreement and have been functioning as employees ever since, this is the moment that gap becomes visible.
What else moved
| Area | The change |
|---|---|
| ESI coverage | Applied on the wage definition rather than assorted gross headers, which pulls some mid-level staff into scope who previously sat outside it |
| Overtime | Payable at twice the ordinary wage rate |
| Payment timelines | Monthly-paid employees must be paid before the seventh of the following month, with tighter full and final settlement timelines on exit |
| Working hours | The OSH Code permits flexible weekly scheduling within daily and weekly caps set by the rules, including compressed week arrangements |
| Women in night shifts | Permitted with consent, subject to prescribed transport and safety arrangements |
| Contractor chain | The principal employer must ensure contractors are funded sufficiently to pay statutory wages, and carries liability if they are not |
| Gig and platform workers | Brought into the social security framework, with aggregator contribution rates still awaiting notification |
The other regime landing at the same time: DPDP
Separately from the Labour Codes, India’s Digital Personal Data Protection Rules were notified in November 2025, operationalising the DPDP Act 2023. Compliance is phased over eighteen months, with full substantive compliance required by mid-May 2027, and penalties running to hundreds of crores.
This matters for employment because employee data is personal data. Your India payroll, your HR files, your background checks, your access logs. If your India team sits inside your global HR system, you now have an Indian regulator with a view on how that data is collected, retained, secured and deleted, and on how quickly you disclose a breach.
Most foreign employers are treating 2026 as the build year. If you have not mapped where India employee data flows, that is a reasonable thing to put on this quarter’s list.
What this means if you are hiring in India without a local entity
Everything above applies to whoever is the legal employer. If you have incorporated in India, that is you, and this is now your project. If you are working through an Employer of Record, it belongs to the EOR.
That is the honest case for the model right now. Not that it is cheaper, but that the compliance surface has just widened significantly and it is a poor use of a fifteen-person company’s attention to build state-by-state Indian labour expertise in-house to support six engineers.
A few things to check with any EOR provider, ours included, given what has changed:
| Question to ask | Why it matters now |
|---|---|
| Have you restructured existing employees to the 50 percent wage rule, and who absorbed the cost? | If they have not, the liability is accruing quietly. If they have and passed it on without telling you, you will find out at renewal |
| Are new appointment letters in the prescribed format? | This is the first document an inspector reads |
| How are you tracking state rule notifications for the states my people sit in? | Compliance is now genuinely state-specific in a way it was not before |
| Are fixed-term gratuity liabilities provisioned from year one? | A new accrual that did not exist eighteen months ago |
| How is my employee data handled under DPDP? | Your EOR is processing personal data on your behalf and your contract should say what that means |
| Does the structure keep me clear of permanent establishment triggers? | The Codes did not change PE analysis, but a restructuring is a sensible moment to re-examine it |
If a provider cannot answer the first two specifically, with dates, that tells you something.
A short plan for the rest of this year
- Model the 50 percent wage rule against your current India packages and decide now whether you hold package constant or gross up.
- Communicate the change to affected employees before the first restructured payslip, not after.
- Reissue appointment letters in the prescribed format, starting with new hires and working back.
- Provision for fixed-term gratuity from year one.
- Confirm which of your employees’ states have notified final rules and which have not.
- Map where India employee data lives and who touches it.
- Re-read your EOR or vendor contract and check who carries the cost of all of the above.
Where we sit
97 Tech Center is an Employer of Record based in Goregaon West, Mumbai. We employ several hundred people across India on behalf of overseas companies, which means the changes above are our operational problem rather than a topic we write about.
If you are hiring in India, or you already have a team here and you are not certain how the Codes have landed on it, we are happy to walk through it. No obligation, and if the answer is that you should be talking to your own counsel rather than to us, we will say so.
Talk to us about your India team
This article describes the position as of August 2026 and is general information, not legal or tax advice. State rules are still being notified and the picture continues to change. Please take advice from qualified Indian counsel or a chartered accountant on your specific circumstances.