Higher CTC, Lower Take-Home: How to Negotiate a Job Offer Under the New Labour Codes

You have an offer letter in front of you. The cost to company is 5% higher than what you earn now, the manager is keen, and HR wants an answer by Friday. Then you work out the monthly figure and it is, give or take a few rupees, the same as your current salary. Sometimes it is lower.

Nobody has made a mistake. Since 21 November 2025, when India’s four labour codes came into force, salaries are increasingly built so that at least half of your pay counts as “wages”, and wages are what provident fund and gratuity are calculated on. A bigger wage base means more of your CTC goes into those two pots and less reaches your bank account each month. If your current employer still pays you on an old structure with a thin basic salary, a new employer that follows the codes can offer you more on paper and less in hand.

This guide shows how that happens, with numbers, and what to ask before you sign.

The 50% line in the Code on Wages

Section 2(y) of the Code on Wages defines wages as all your remuneration, explicitly including basic pay, dearness allowance and retaining allowance, and then lists what is left out: house rent allowance, conveyance, overtime, commission, the employer’s own PF contribution, statutory bonus, gratuity and a few others.

The catch is in the proviso that follows. If those left-out items add up to more than half of your total remuneration, the excess is added back to wages anyway. So an employer can no longer pay a basic of 30% and call the rest allowances; anything beyond the 50% limit counts as wages whether it is labelled that way or not. The Code lets the Central Government change the 50% figure by notification.

Most employers are meeting the rule the simple way, by raising basic pay to at least half of total pay. On a plain reading of the section, a generic “special allowance” is not on the excluded list either, which is one more reason payroll teams are folding it into basic rather than arguing the point.

The Labour Ministry’s FAQs of 16 March 2026 settled several details that matter in an offer:

• Overtime allowance counts towards the excluded half.
• Annual performance incentives are not wages. A larger variable component does not raise your PF or gratuity base.
• Benefits in kind, such as meal coupons or a mobile recharge, are part of remuneration, though only up to 15% of wages can be counted as wages.
• The new definition applies from 21 November 2025.

The central rules under all four codes were notified on 8 May 2026. Labour is a subject shared with the states, and several states are still finalising their own rules, but the definition of wages comes from the Code itself.

A 5% raise that pays less: the arithmetic

Take someone earning a CTC of ₹12 lakh a year, ₹1 lakh a month, on an old-style structure with basic at 35% of CTC. The new employer offers a raise and builds the salary the way the codes push employers to, with basic at 50%. Both employers deduct PF at 12% of the full basic and put a gratuity provision inside the CTC.

In this example the switch only starts paying more each month once the raise passes about 5%. A 10% raise on CTC turns into a 4.7% rise in monthly cash. The rest has not vanished, as the next section shows, but it is not money you can spend this month.

Where the money goes instead

Provident fund: yours, but later

In the 10% example, ₹13,200 a month goes into provident fund instead of ₹8,400, counting both your share and the employer’s. That is ₹57,600 a year more saved for retirement, and part of the employer’s share goes to the pension scheme rather than your EPF balance. For someone who would otherwise not save it, this is a good outcome. For someone with an EMI, rent and school fees due on the first of the month, it is a squeeze.

Gratuity: counted in your CTC, paid only if you stay

Gratuity is the line that most often inflates a CTC. Under section 53 of the Code on Social Security it is 15 days’ wages for every completed year of service, based on your last-drawn wage, and a permanent employee generally qualifies only after five years of continuous service. If you leave after three years, the gratuity that was shown in your CTC every month is never paid.

Two changes cut the other way. Fixed-term employees now qualify after one year of a contract, according to the Ministry’s FAQs, and are paid pro rata. And for anyone who does reach five years, the FAQs say the whole period is paid on the last-drawn wage under the new, wider definition, which means a larger gratuity cheque than the old basic-only calculation would have produced.

The PF question that changes the answer

Everything above assumes PF is taken at 12% of your full basic. Many employers do not do that. The law requires contributions only on wages up to the EPF ceiling, and contributions above it are optional for both sides. That ceiling rose from ₹15,000 to ₹25,000 a month on 17 September 2026, as covered in our report on the new EPF wage ceiling.

If your current employer caps PF at ₹15,000 and the new one caps it at ₹25,000, the 5% raise in the table above leaves you about ₹1,759 a month better off instead of ₹41 worse off. Your own PF deduction goes from ₹1,800 to ₹3,000 rather than from ₹4,200 to ₹6,300. The same offer can be a gain or a loss depending on a policy that is rarely written into the offer letter.

How to negotiate when the CTC is no longer the number

1. Negotiate on monthly cash, not CTC. Work out your current take-home before tax and decide the minimum rise in that figure that makes the move worth it. Then ask HR what CTC produces it under their structure. Quote the cash figure, not a percentage hike.
2. Strip the CTC down before comparing. Take away the employer’s PF, the gratuity provision, group insurance premiums and any variable pay. What is left is the fixed cash you can count on. Compare that with the same figure from your current payslip, not CTC with CTC.
3. Treat variable pay at its real payout. If the variable component pays out at 70% in a normal year, value it at 70%. Because annual incentives are not wages under the codes, a bigger variable share does keep your PF lower, but it also moves risk onto you.
4. Ask for the gap as a fixed component, not a bonus. A joining bonus covers the first year and then disappears from the base on which every future raise is calculated. If the in-hand gap is permanent, the fix should be too.
5. Count gratuity only if you expect to stay five years. If you are likely to move again in two or three years, mentally remove it from the offer.
6. Check the tax side. Your own PF contribution reduces taxable income only under the old tax regime, through the ₹1.5 lakh deduction that section 123 of the Income-tax Act, 2025 carries over from section 80C. Under the default new regime, a higher PF deduction lowers your take-home without lowering your tax.

For lower salaries one more deduction can appear. Employees whose wages are within ₹21,000 a month are covered by ESI, which takes a small share of wages, and the Ministry says that threshold continues until new rules set a different figure.

When a smaller payslip is still the better offer

A code-compliant salary is not a worse salary. It saves more for you, it raises your gratuity if you stay, and it moves pay out of loosely defined allowances into a base that every future increment builds on. The problem is only that the CTC figure hides the trade. Once you have the full breakup, you can decide whether an extra ₹57,600 a year in provident fund is worth more to you than the same money in hand, and negotiate the fixed pay to match.