Under the Code on Wages, 2019: Salary Components Included and Excluded

With the implementation of Code on Wages, 2019 by the Government of India, employers in India had to re-interpret and re-structure salary components. Among these changes, one of the more frequently debated and concrete aspects of this reform involves defining "wages", particularly how it will affect Cost to Company (CTC) structuring.

It has become obligatory for HR professionals, payroll managers, compliance officers, CFOs and business owners to comprehend the new wage framework. It has a direct impact on PF contributions, Gratuity Liability, Bonus Computation, and Statutory Compliance.

So Why Does the Definition of Wages Matter?

The definition of wages has been standardized across multiple labour laws under the Code on Wages, 2019. Now, the definition impacts:

Provident Fund contribution base
Gratuity calculation
Bonus eligibility
Overtime payments
Retrenchment compensation
Leave encashment
Inspection and audit assessments

The 50% threshold concept introduced under the Code means that salary structures arranged with a sole aim of saving tax may need compliance rework.

CTC Components – Included and Excluded under the Code on Wages, 2019

✔ Included✖ Excluded★ Included (Up to 15%)

S.No.	CTC Component	Status	Relevant Section	Key Remarks
1	Basic Salary	✔ Included	Section 2(y)	Core wage component; always included
2	Dearness Allowance (DA)	✔ Included	Section 2(y)	Specifically included in definition
3	Retaining Allowance	✔ Included	Section 2(y)	Expressly included
4	Special Allowance (Fixed)	✔ Included	No section for exclusion	Included unless it qualifies under exclusion
5	House Rent Allowance (HRA)	✖ Excluded	Section 2(y)(f)	Specifically excluded
6	Conveyance Allowance	✖ Excluded	Section 2(y)(d)	Specifically excluded
7	Leave Travel Allowance	✖ Excluded	Section 2(y)(d)	—
8	Medical Allowance	✔ Included	No section for exclusion	If it's fixed
9	Medical Reimbursement	✖ Excluded	Section 2(y)(e)	—
10	Performance Based Incentive	✖ Excluded	Section 2(y)(e)	If it's variable
11	Statutory Bonus	✖ Excluded	Section 2(y)(a)	Specifically excluded
12	Sales Commission	✖ Excluded	Section 2(y)(e)	If it's variable
13	Company Leased Car	✖ Excluded	Section 2(y)(b)	—
14	Employee Stock Option Plan (ESOPs)	✖ Excluded	Section 2(y)(e)	—
15	Overtime	✖ Excluded	Section 2(y)(h)	Specifically excluded
16	Employer PF Contribution	✖ Excluded	Section 2(y)(c)	Employer contribution excluded
17	Employer ESI Contribution	✖ Excluded	Section 2(y)(c)	—
18	Gratuity (Payable on termination)	✖ Excluded	Section 2(y)(j)	Gratuity excluded
19	Retrenchment Compensation	✖ Excluded	Section 2(y)(k)	—
20	Leave Encashment	✖ Excluded	Section 2(y)(k)	Separation-related payment
21	Fixed Monthly Attendance Bonus	✔ Included	No section for exclusion	—
22	Shift Allowance	✔ Included	No section for exclusion	—
23	Uniform Allowance	✖ Excluded	Section 2(y)(e)	Specific-purpose allowance
24	Washing Allowance	✖ Excluded	Section 2(y)(b)	Specific-purpose allowance
25	Free Accommodation	✖ Excluded	Section 2(y)(b)	—
26	Reimbursement (Actual bills)	✖ Excluded	Section 2(y)(e)	—
27	Supply of Light & Water	✖ Excluded	Section 2(y)(b)	—
28	Free Transport/Bus facilities	✖ Excluded	Section 2(y)(b)	—
29	Creche facilities	✖ Excluded	Section 2(y)(b)	—
30	Gym or Recreational memberships	✖ Excluded	Section 2(y)(b)	—
31	Health Insurance	✖ Excluded	Section 2(y)(b)	—
32	Medical Attendance	✖ Excluded	Section 2(y)(b)	—
33	Food Coupons/Meal Cards	★ Up to 15%	Section 2(y) Explanation	Wages in kind provision
34	Free Food (In Kind)	★ Up to 15%	Section 2(y) Explanation	Wages in kind provision
35	Free Canteen (In Kind)	★ Up to 15%	Section 2(y) Explanation	Wages in kind provision
36	Free Clothing/Uniforms	★ Up to 15%	Section 2(y) Explanation	Wages in kind provision
37	Gift Vouchers	★ Up to 15%	Section 2(y) Explanation	Wages in kind provision

Praans Consultech Support for Wage Code Compliance

We at Praans Consultech, provide end-to-end help in helping organizations adopt the new wage code in a phased and compliant manner.

Analysis of the Wage Structure and Identify Gap: We look at the existing CTC models and analyse their compliance gaps under the Code on Wages, 2019.
Component-Wise Mapping: Each of the components of salary are detailed out and mapped to statutory treatment so as to avoid misclassifications.
50% Rule Impact Assessment: We deeply check existing CTC structure and assess financial implications and restructure CTC to minimize the financial impact.
Drafting Policies and Documentation: We help in updating of appointment letters and HR policies with the new labour codes.
End-to-End Labour Code Advisory: Besides wage definition, we support the implementation of all new labour codes for a holistic compliance readiness.

FAQ

What is 'wages' under the Code on Wages, 2019?
Code on Wages, 2019 under Section 2(y) defines wages as any remuneration paid to a worker in employment, subject to legal inclusions/exclusions, and the 50% threshold rule.
Is Basic Salary a component of wages?
Yes. It is the core component and the base for statutory calculations.
Is Dearness Allowance (DA) included in wage calculation?
Yes. Under the Code, DA is categorized as part of wages.
What will be the treatment of HRA under the new wage code?
HRA is specifically excluded under Section 2(y)(f), but is liable for the 50% threshold rule.
Is Special Allowance included in wages?
A fixed Special Allowance is generally included. Treatment depends on its structure.
Are performance bonuses included in wages?
Variable performance bonuses are excluded under Section 2(y)(e). Fixed ones may be included.
Is employer PF contribution included within wages?
No. Employer statutory contributions are specifically excluded under Section 2(y)(c).
Do fuel or telephone reimbursements come under wages?
Actual expense-based reimbursements are excluded. Fixed allowances are included.
How are non-cash benefits treated?
Wages in kind up to 15% of total wages can be counted as wages under Section 2(y) Explanation.
Are overtime payments included in wages?
No. Overtime is specifically excluded under Section 2(y)(h).
Are incentives and sales commission included in wages?
Variable commissions are excluded. Fixed periodic payments may be included.
What is the '50% rule' under wage code?
If excluded components exceed 50% of total remuneration, the excess shall be considered wages for all legal purposes.
Is gratuity calculated on the new wage definition?
Yes. Gratuity calculation will depend on the wage-base interpretation under the Code framework.
Why is component-wise classification significant for employers?
It ensures correct statutory compliance, accurate cash flow, and audit readiness.
How can employers ensure proper implementation of the wage definition?
HR must do a component-wise CTC audit, assess the 50% impact, align payroll accordingly, and seek professional advisory support.

Disclaimer: The views expressed in this article are for general informational purposes only and reflect our understanding of the subject matter. They do not constitute legal advice or a formal legal opinion. For case-specific guidance or accurate compliance support, please contact us at info@praansconsultech.com

Under the Code on Wages, 2019: Salary Components Included and Excluded

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