Most SME salary structures are built with a mix of basic pay and allowances. The Code on Wages changes how HR teams determine which components are treated as ‘wages’ for payroll calculations.
What is the 50% wage rule under the Code on Wages?
Wages include basic pay, dearness allowance, and retaining allowance. These must form at least 50% of total remuneration.
If they do not, a portion of the remaining components is treated as wages for calculation.
Example of the 50% wage rule in salary structures
Consider a salary of ₹60,000 with ₹15,000 as basic pay.
In the structure, wages are ₹15,000. Since this is less than 50% of total remuneration, part of the remaining amount is treated as wages. For statutory purposes, wages here are considered as ₹30,000.
How the 50% wage rule affects payroll calculations
When wages fall below 50% of total salary, the Code on Wages requires that a portion of the remaining components be treated as wages for statutory calculations.
In this case, while the salary structure shows ₹15,000 as wages, calculations are carried out on ₹30,000 to meet the 50% requirement.
This affects how PF, gratuity, and bonus are calculated, and can also impact full-and-final (FnF) settlements - creating a difference between what the structure shows and what is used in payroll.
What SMEs should review for wage compliance
If you are managing payroll for an SME, it is useful to review:
- How ‘wages’ are defined under the Code
- Who counts as an employee
- How to audit current payroll data
- How to restructure salary components
- How edge cases like bonuses and variable pay are treated
- What non-compliance can lead to
- How to fix and document compliance
A detailed walkthrough of these scenarios, along with practical examples and step-by-step guidance, is covered in the full guide.
Access the full guide - Updated April 2, 2026 to reflect latest rule changes The 50% Wage Rule: A Practical Guide for HR and Finance Teams
