India’s March 2026 Labour Code FAQs, Explained for Foreign Employers
By Kiran, Founder, Saileor. Last updated 7 July 2026. Every claim below links to the Ministry’s own documents.
On 16 March 2026, India’s Ministry of Labour and Employment published a fresh set of Additional FAQs on the four Labour Codes. They answer the questions payroll teams have been fighting over since the Codes took effect on 21 November 2025.
Most coverage of these FAQs is written for Indian lawyers. This post is for the founder or HR lead sitting in Austin or Berlin, employing people in India through an EOR or their own entity, who needs to know one thing: what do I have to change?
Short answer: your CTC structures probably need an audit, your fixed-term contracts got more expensive, and your offer letters need new math. Details below.
One caveat before we start. The Ministry states the FAQs are non-binding. Where an FAQ conflicts with the Code text, the Code wins. Treat these as the government telling you how it intends to enforce.
The 50% wage rule just got sharper teeth
The rule itself is not new. Under the Code on Wages, “wages” (the base for PF, gratuity, and most statutory contributions) must be at least 50% of total remuneration. If your allowances exceed 50% of the package, the excess gets added back to wages anyway.
What the FAQs clarified is what counts inside that calculation:
| Component | In or out of the 50% computation |
|---|---|
| Overtime allowance | In. Excess over 50% is added back to wages |
| Employer PF and pension contribution | In, per Section 2(y)(c) |
| Statutory bonus | In |
| Gratuity | Out |
| ESI contributions | Out |
| Annual performance incentives | Out. Not wages at all |
| Benefits in kind (food coupons, mobile recharge) | In, capped at 15% of total wages |
Two of these matter a lot for foreign employers.
First, overtime. If your India team works paid overtime, that allowance now sits inside the 50% test. A package structured to keep basic pay exactly at the 50% floor can get pushed over by an overtime-heavy quarter, which silently raises your PF and gratuity base. Audit any role with regular overtime.
Second, performance incentives. The Ministry confirmed annual performance bonuses are not wages. This is good news: you can keep variable pay outside the statutory base, as long as it is a genuine annual performance award and not disguised monthly salary.
Fixed-term employees: gratuity after one year, with a catch
Under the old Payment of Gratuity Act, employees needed five years of service to earn gratuity. The Social Security Code cut that to one year for fixed-term employees, and the FAQs resolved the edge cases:
A fixed-term employee becomes eligible for gratuity after one year of service from the start of the contract. An 11-month contract that ends on schedule earns nothing. An employee who quits a two-year contract at month 10 also earns nothing. Cross the one-year line and gratuity accrues, pro rata, at 15 days’ wages per completed year.
The catch for cost planning: gratuity is now calculated on the new, wider wage definition. Wages are at least 50% of the package by law, so for many employers both the eligibility window and the wage base grew at the same time. If you run one-to-three year engagement patterns in India, which is most companies hiring through an EOR, this is a real line item, not a rounding error. We wrote a separate breakdown of the fixed-term gratuity math [here → ].
Also clarified: fixed-term employment covers only people you engage directly. Contract labour hired through a staffing contractor is the contractor’s gratuity liability, not yours, and still carries the five-year threshold.
Timing: which rules govern which years of service
The FAQs confirmed the revised wage definition took effect 21 November 2025, and gratuity applies prospectively from that date. Service before it falls under the Payment of Gratuity Act, 1972; service after falls under the Code. But the last-drawn wage at exit, computed under the new definition, sets the quantum for the entire period.
Read that twice. An employee hired in 2022 who resigns in 2027 gets gratuity for all five years calculated on the new, higher wage base. The Codes reached back and made your historical service liability more expensive. If you carry gratuity accruals on your books for India staff, they need restating.
Overtime now reaches managers
The FAQs clarify that any employee whose minimum wage is fixed under the Wages Code is eligible for overtime, including supervisory and managerial staff. Overtime kicks in past 8 hours a day or 48 hours a week, at double the normal rate, computed from the eighth hour even in states permitting a 12-hour working day.
For foreign employers running India teams across time zones, late calls with the US West Coast are the obvious pressure point. Most white-collar packages will sit above minimum wage thresholds, but check where your junior roles land.
Leave: a two-tier system you need to operationalise
Leave provisions under the OSH&WC Code apply to “workers,” plus supervisors earning up to Rs 18,000 per month in wages. Managerial staff above that line sit outside the Code’s leave provisions, governed by your policy and state Shops and Establishments law instead.
For workers: carry-forward is capped at 30 days, but leave applied for and refused carries forward without limit, and there is no cap on encashment at exit. If your HR policy blanket-caps encashment, it is now non-compliant for anyone classified as a worker.
What to actually do this quarter
Re-run the 50% test on every India CTC, including projected overtime. Restate gratuity accruals on the new wage base, including pre-2025 service. Reprice any fixed-term contracts longer than 11 months. Split your leave policy by worker versus non-worker classification. And if all of this is exactly why you did not want an Indian entity in the first place, that is the problem an EOR exists to solve: under our EOR model, restructuring and filings are our liability, not your homework. Estimate your fully loaded cost per hire, including the new gratuity math, with our India Hiring Cost Calculator, or check whether EOR is even the right route for you with the India Hiring Readiness assessment.
More questions? The India Hiring FAQ covers the full compliance stack, updated for the Codes.
Saileor is an India-specialist Employer of Record, ISO 27001:2022 and ISO 9001:2015 certified. We employ your India team under our entity so you get compliance without incorporation. Talk to us.
Sources: Ministry of Labour Additional FAQs, 16 March 2026 (PDF) · Ministry Compliance Handbook for Employers, Feb 2026 (PDF) · Ministry Labour Codes portal · SCC Times analysis, 26 April 2026
