Ms. Kavitha Jagadeesan, Director, Deloitte Touche Tohmatsu India LLP, a chartered accountant specializing in labour law compliance, delivers a comprehensive analysis of India’s Code on Social Security, focusing particularly on the contentious wage definition and its practical implications for organizations.
Before I even start, I should acknowledge the highest degree of embarrassment—seeing my LinkedIn profile projected before the entire crowd. This is what happens when we write things in a certain way on LinkedIn! But anyways, it’s a good experience, and I’m trying to control my embarrassment.
I want to know how many of us are familiar with Tamil movies and comedies. There’s one movie where a board keeps getting wiped clean with every discussion—that’s exactly what my session is going to be today. I was wondering how to approach the Code on Wages when the previous speaker already touched upon it without covering gratuity. So I thought, let me add more masala to the fourth session.
You’ve heard from lawyers and legal practitioners all morning. With due respect to them, here I am to present a chartered accountant’s perspective on the Code on Social Security and the wage definition. At the outset, thank you so much. I’ve never seen a full-packed session, and that too from morning, you’ve been attending this master class with full interest. There’s not even a single tiring look I could see, which makes me super enthusiastic to give my perspective and add more flavor to whatever has been done this morning.
Understanding the Code on Social Security
I’m not a section or clause provisor person. I try to understand concepts so that it’s easy for us to implement. Initially, when the first draft was submitted in 2019, a committee reviewed it, and the initial preamble stated the goal was to consolidate social security for employees. After deliberations from different company representations, they modified it. The goal now is to consolidate laws and extend social security to all employees and workers.
The first confusion started: if it’s extending social security, which part? If it’s employees, then who are the workers? Aren’t workers also employees? The intention is very clear—any establishment, any worker, any employee, our first check is whether the social security benefit is extended to them or not.
Legislations Covered
From 1923 till 2008, there were so many legislations talking about social security to employees. Now they’ve tried to consolidate everything. These legislations are arranged in multiple chapters within the Code on Social Security. This received presidential assent on September 29, 2020, and was made effective November 21, 2025. They specifically removed EPF from the subsumed part, so EPFO is still not repealed.
Government’s Pro-Employee, Pro-Women, Pro-Growth Agenda
According to the government’s press releases on pib.gov.in, the Code on Social Security is described as pro-employee, pro-women employee, and pro-growth. Let me highlight key features:
For fixed-term employees (FTEs), gratuity is extended. Before November 21, 2025, the entire issue was about whether PF would be impacted by the wage definition, which would affect take-home pay. But now, safe and strategically, the PF Act is not repealed. Even otherwise, the legislation itself says for PF and ESI, it applies to employees whose wages do not exceed the notified limit. So for wages above ₹15,000 for PF, we’re not even covered.
New concepts are introduced for gig and platform workers—they’re trying to bring everybody into the ambit of universal coverage. The family definition is enhanced to cover in-laws for women employees. I still have a question: why aren’t in-laws for men employees covered? For a single child who is a daughter, when she gets married, who will take care of her parents?
Accident coverage now includes accidents happening during commute to the office, which wasn’t covered under existing provisions. Previously, only accidents at the workplace were covered. Now, if an accident happens from home to office at a reasonable route, it can be considered for employee compensation benefit.
The National Social Security Framework
A National Social Security Board is now created, along with a Social Security Fund. Benefits going to gig and platform workers will be routed through this fund. We have an Unorganized Workers Social Security Board at the state level because mechanics by the central government would be difficult for the unorganized sector.
Key Definitions
Gig workers are like freelancers—someone who can come into your office for particular work and then leave. For example, if you have a testing issue and you’re not assigning them full-time but just for that one particular project, they’re gig workers. They don’t have an employer-employee relationship.
Platform workers include Swiggy, Zomato, Blinkit, and Zepto delivery personnel. Except for what we collect from them as tips, the government is trying to protect them through social security.
Fixed-term employment raises fundamental questions. In an organization, if the employment contract doesn’t have an end period but is provided as one or two years, does that alone qualify the person as undergoing fixed-term employment? Is a retainer working in an organization a fixed-term employee? We need to see if the same benefits provided to regular employees are also provided to fixed-term employees, and if job allocation is clearly defined. Project-based hiring, festival season hiring for six months, compliance season hiring for three to six months—these are all fixed-term employees.
The EPF and ESI Reality Check
There are no changes in PF. One point I’d like to highlight is that under this code, there’s a voluntary opt-out mechanism available, which is actually not publicized in media. It’s very much available in the act itself—voluntarily, subject to conditions and request made to the Central Provident Fund Board, the organization can also opt out of provident fund.
I see a trend where clients say they don’t want to opt for provident fund because they need better take-home so they can invest better in the market rather than somebody investing for them in other funds. We can wait and watch for the mechanism when rules come out.
For organizations with PF trusts, if you’re already exempted from PF, it continues. These provisions will still continue under the existing code.
The Wage Definition Controversy
Now the most interesting definition: wages. Let me take a clear example. The definition says everything is part of wages. Visualize we have a green basket which has all components from the employment contract. Now, from that, each and every component will have to be analyzed to see if it falls under the exclusions bucket. This is how the definition reads.
All remuneration, including basic, DA, and retaining allowance—it’s just clarificatory in nature. So if ₹100 is all my components in my employment contract, that ₹100 will be in my green barrel. Now, each and every component I analyze to see whether it falls under the specified exclusions. I pull it out and put it under my red barrel—the exclusion barrel. Then I compare if my red barrel is more than 50% or not.
Practical Scenarios
Let me give you examples with different salary structures:
Scenario A: Basic ₹30,000, HRA ₹20,000, Special Allowance ₹50,000 Under PF presently, if it’s more than ₹15,000, we contribute on ₹30,000 basic. For ESI, we take the total ₹100,000. For gratuity, we take ₹30,000.
Under the Code on Social Security, I have my total of ₹100,000. I will pull out only the HRA which is ₹20,000. That means ₹30,000 + ₹50,000 = ₹80,000 will be my wage base.
Scenario B: Basic ₹50,000, HRA ₹20,000, Special Allowance ₹30,000 Many people say if I keep my basic as 50%, everything is solved. No! The government didn’t say basic has to be 50%. Right now, all remuneration should be considered except for exclusions. Basic is ₹50,000—am I compliant? The answer is no, because I’m putting all ₹100,000 in the green barrel and only removing ₹20,000. So ₹80,000 is still my wage base.
I have a fundamental question: we know the concepts very well, but we’re still dependent on our payroll provider software. If you’re changing basic to ₹50,000, will the PF not be automatically calculated on the higher amount? That’s why I agree—let’s not change the basic now. But for gratuity purposes, add the delta. How are you going to deal with your payroll vendors?
Realignment Strategy
These are the exclusions available: bonus paid once a year, value of house accommodation, PF and pension contributions including interest, conveyance, special expenditure, house rent allowance, and overtime allowance.
The secretary of the Ministry of Labour and Employment mentioned this is the timeframe where we have to use realignment of compensation. There should be a degree of reasonableness. If there are other elements or special elements in your compensation structure, you can take the goodie points by talking to your CEOs or CFOs, saying here are the components that could be excluded.
The one line item where there’s no clarity is “some pay to defray special expenses.” Whenever there’s no clarity, that’s where we play around. If your organization isn’t providing conveyance elements or leave travel—thanks to the simplified tax regime, 80-90% of the workforce is going for it where they’re not claiming deductions or exemptions. That’s why companies aren’t looking at restructuring their compensation.
If you have special allowance, you can try to fit it into any of these components reasonably: professional development allowance, gadget lease. These are trending components in the market. But make sure your facts, structure, literature, and policies marry well.
Impact Assessment and Implementation
Having said this, let’s see how amounts are getting changed—almost one or two times we see change on account of gratuity payout. The act is effective November 21st, rules are only awaited. If an employee is about to get gratuity by December 18th, what amount can I still pay?
One can take a conservative position and pay based on existing provisions because the notification clarifies that till rules get into effect, existing provisions will be considered. You can take a legal opinion as backup or tell your employees once rules are finalized, if there’s a delta, we’ll pay it with interest.
Accounting Implications
For accounting, once labour codes are announced, we see lot of interactions between finance and HR teams. Usually they work in silos except for passing accounting entries. Now everybody’s keen to understand what changes the HR team is bringing in. You’ll have to convince your finance folk about the implications you’re trying to reduce through realignment or effective planning of compensation.
Does it stop only here? No. Your FTEs will still be covered. You’ll have to rework with all your workforce categories to see who falls under fixed-term employees. The act prohibits employers from reducing wages or benefits because of the application of this code. So if you’re bringing fixed-term employees onto the roll, if officers view it under that section, we may have to position it differently and strategically.
Other Key Provisions
Maternity Benefits
There’s no change in maternity benefit provisions—same as previously. The paid leaves prescribed continue. The only change is what’s paid on the earlier base will now be on wages. The prevalent rule is if a benefit is availed in one legislation, it cannot be availed in another. If you take benefit under ESI, you can’t take benefit under maternity benefit.
The new crèche facility requires four visits and nursing breaks to be given. Most organizations are effectively planning for it—either providing reimbursement or ensuring within their community they have a crèche. For example, if an IT park has a crèche facility within them accessible to all companies, can this be deployed?
Platform and Gig Workers
For unorganized, gig, and platform workers, we have schemes that will be released. From the aggregate turnover, 1-2% must be put into a fund. The fund will take care of their insurance, life and disability, health and maternity, old age protection, education, injury benefit, housing scheme for children, and funeral assistance.
If you’re engaging freelancers, just do registration. The gig worker will also have to register because you’re not going to transfer the benefit directly—only the contribution goes to the fund.
Welcome Changes in Implementation
Digitization and Single Return
Most records will be online. We’ll have one return for everything except PF. It’s a five-page form covering everything. I’m wondering why the government took so long to bring it this way. Different regulations, different wage definitions, lot of confusion—those are all now removed, and it’s mostly electronic.
Employment Linked Incentive Scheme
How many of you registered? This is a classic case of how digitization has improved. If your organization has additional employees, per additional employee you get ₹3,000 as incentive. Initially, there was noise because people felt it would appear as demand in the portal. Now the government has released FAQs clearly saying there are only two things needed: registration and coding the right gross wage in your PF ECR. If gross wage is less than one lakh and the employee stays for more than six months, you’re eligible.
Is it applicable for lateral hire? Yes. For replacement, it may not be, but for additional employment, even if the person is a lateral hire, the employment-linked incentive scheme will provide incentive.
Five-Year Limitation Period
For PF, there’s now a five-year limit to initiate any inquiry. Technically, you can manage with the last five years. Within two years they have to complete—they can’t drag cases. I have cases going for six-seven years. Now it’s mandated that within two years they have to complete, and if a petition is filed before the Central Provident Fund Board within one year, they can insist to complete it.
Reduced Deposit for Appeals
Previously, for appeals, they’d ask us to pay 70% of the demand. Now it’s restricted to 25% for all appeals.
Moving Toward Facilitation
The entire legislation is moving toward a facilitation approach. As you see, it’s inspector-cum-facilitator. Instead of policing, they’ll have to facilitate—ensure compliances are flowing through. There’s a 30-day notice of improvement given, providing opportunity to clear all non-compliance. It’s like an amnesty scheme, but it’s only for first-time offenses. Repeat offenses are always punishable. Compounding of offenses—50% fine we pay instead of dragging it—saves a lot of time.
Career Centers
Career centers are sophisticated employment exchanges. The government is trying to improve—it’s going to be online. For HRs in the talent acquisition space, your first step is to approach your career center, not any consultant. The form clearly says if there’s a shortage and you’re not able to source profiles from the career center, you have to give the reason why. They’re also expected to do vocational training on basic communication skills relevant for employment opportunities.
Action Plan and Conclusion
Let’s approach this positively without fear or trauma. From a Code on Wages or Code on Social Security perspective, please do a cleanup activity. Go through compensation items you have and align what is the wage.
Financial impact assessment: assess how much impact exists. There are situations where only 1-2% increase could occur. You can either protect employees by bearing costs, or if gratuity contribution is part of CTC, there could be 0.5-1% impact on take-home. Will that trigger Section 124? We have to be prepared first.
Workforce arrangement: with FTEs, whether on-roll employees are still required is an analysis based on your organization structure.
Framework and documentation: whatever is done in the office isn’t going to matter anymore—it has to be documented. Please update policies. Wherever new policies or SOPs are required, build them in.
Communication: we ourselves aren’t clear yet, but once we are, adequately communicate to employees. Track updates daily as developments keep coming. Once implemented, don’t stay cool or leave it to payroll or finance teams. As HR, do the due diligence because any questions will come to you.
Questions and Answers
Q: How can the overall 50% wage structure be divided among various components?
A: We don’t have a structure or template given by the government. My suggestion is if you have 30-40% basic, retain that. When restructuring special allowance, put it into professional development or conveyance exclusions, making sure it doesn’t exceed 50%.
Q: Maximum amount of gratuity payment in the code?
A: The existing ₹20 lakhs continues, but if you want to pay over and above, it’s still fine.
Q: How should organizations reassess workforce models?
A: It’s purpose-driven. You can’t simply put everybody on roll. If you have seasonal deployment, putting them on roll—will your business absorb the cost? Vice versa also holds—if you have on-roll employees and move them to fixed-term 11 months and renewing, that will be viewed as ultra vires.
Q: Is construction industry covered under ESI?
A: Yes, coverage is there, and construction contributions are also being provided. The employer will have to pay 1-2% of the cost of construction.
Q: If conveyance allowance is paid uniformly to all employees, is it excluded from PF wages?
A: Even if paid regularly or uniformly, it’s still an exclusion because it falls under the exclusion basket.
Q: Is production incentive covered?
A: Production incentive is not covered under exclusions. Only sales commissions are there. If not covered under exclusion, it will be covered under wage.
