[Analysis] Definition of Wages under Code on Social Security 2020 – Section 2(88) | The One-Half Rule | What It Changes

The definition of wages under the Code on Social Security 2020 is in section 2(88). It includes basic pay, dearness allowance and retaining allowance, and excludes eleven listed heads. Its first proviso is what changed payroll: where the payments under sub-clauses (a) to (i) of the exclusion list exceed one-half of all remuneration, the excess is deemed to be remuneration and added back into wages. One definition replaced five, so the same figure now drives provident fund, ESI, gratuity, maternity benefit and compensation.

Law stated as on 1 September 2026. The Code on Social Security, 2020 was brought into force in stages, the bulk of it with effect from 21 November 2025.

Table of Contents

1. Five definitions became one
2. What section 2(88) includes
3. The eleven exclusions
4. The one-half proviso, worked through
5. The second proviso, and why it does not help here
6. Remuneration in kind, and the fifteen per cent limit
7. What it changes, chapter by chapter
8. What an employer cannot do about it
9. Frequently asked questions
10. Conclusion

1. Five definitions became one

Under the repealed Acts an employer could be running several different wage bases in a single payroll, because each Act defined wages for its own purposes. Section 2(88) of the Code on Social Security, 2020 is the successor to all of them:

• section 2(1)(m) of the Employee’s Compensation Act, 1923;
• section 2(22) of the Employees’ State Insurance Act, 1948;
• section 2(b) of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952;
• section 3(n) of the Maternity Benefit Act, 1961; and
• section 2(s) of the Payment of Gratuity Act, 1972.

That consolidation is the single change in the Code with the largest arithmetical effect. The Ministry of Labour and Employment’s Compliance Handbook for Employers under the Four Labour Codes sets the definition beside the rest of the reform. The same eleven exclusions carry across to the definition of wages in the Industrial Relations Code, 2020, against only three under the Industrial Disputes Act, 1947. A salary structure engineered to satisfy five separate definitions no longer works, because there is now one base and it is deliberately harder to engineer around. The wider mapping is in our note on the nine Acts subsumed in the Code.

2. What section 2(88) includes

The opening words are wide. Wages means all remuneration, whether by way of salaries, allowances or otherwise, expressed in terms of money or capable of being so expressed, which would, if the terms of employment express or implied were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment.

Three things are then expressly included:

• basic pay;
• dearness allowance; and
• retaining allowance, if any.

The structure is worth pausing on. The definition does not say wages means basic pay plus dearness allowance plus retaining allowance. It says wages means all remuneration, includes those three, and does not include eleven others. Anything that is remuneration and is not on the exclusion list is wages without needing to be on the inclusion list.

3. The eleven exclusions

Sub-clauses (a) to (k) take eleven heads out of wages:

Clause	Excluded head	In the one-half test?
(a)	Statutory bonus not forming part of the remuneration payable under the terms of employment	Yes
(b)	House accommodation, light, water, medical attendance or other amenity, or any service excluded by a general or special order of the appropriate Government	Yes
(c)	Employer’s contribution to any pension or provident fund, and interest accrued on it	Yes
(d)	Conveyance allowance or the value of any travelling concession	Yes
(e)	Sums paid to defray special expenses entailed by the nature of the employment	Yes
(f)	House rent allowance	Yes
(g)	Remuneration under an award or settlement between the parties, or an order of a court or Tribunal	Yes
(h)	Overtime allowance	Yes
(i)	Commission payable to the employee	Yes
(j)	Gratuity payable on termination of employment	No
(k)	Retrenchment compensation or other retirement benefit payable to the employee, or any ex gratia payment made to him on the termination of employment, under any law for the time being in force	No

The right-hand column is the part most summaries omit. The first proviso applies to sub-clauses (a) to (i), not to (a) to (k). Gratuity and retrenchment compensation are excluded from wages and stay excluded however large they are; they are not counted in the arithmetic that adds allowances back.

4. The one-half proviso, worked through

The first proviso is the operative rule:

Provided that for calculating the wages under this clause, if payments made by the employer to the employee under sub-clauses (a) to (i) exceeds one-half, or such other per cent as may be notified by the Central Government, of the all remuneration calculated under this clause, the amount which exceeds such one-half, or the per cent so notified, shall be deemed as remuneration and shall be accordingly added in wages under this clause.

Four steps follow from that wording.

1. Compute all remuneration under the clause.
2. Add up the payments falling under sub-clauses (a) to (i).
3. Take one-half of all remuneration, or such other percentage as the Central Government notifies.
4. Where step 2 exceeds step 3, the excess is deemed remuneration and added into wages.

Two points of precision matter here. The proviso adds back only the excess over one-half, not the whole of the excluded allowances. And the one-half is not fixed in the Code: it is “or such other per cent as may be notified by the Central Government”, so the threshold can be moved by notification. No notification varying it appears among the instruments issued up to 1 July 2026.

The consequence for salary design is straightforward. Take a package split thirty per cent basic pay and seventy per cent allowances, with none of the seventy being dearness allowance. Under the repealed law the provident fund base was basic wages plus dearness allowance plus retaining allowance, so on those facts it was thirty. Under section 2(88) it is fifty, because twenty of the seventy is added back. Pushing the allowance share higher does not help; it only increases the add-back. The proviso does not cap the wage base, it puts a floor under it at one-half of all remuneration, so far as the sub-clause (a) to (i) heads are concerned.

The response of simply reclassifying pay has already been discouraged. In Union of India & Others v. Heavy Vehicles Factory Employees’ Union and Another 2026 LLR 249 (SC), the Supreme Court held that the sudden exclusion of allowances for the purpose of calculating statutory benefits is illegal.

5. The second proviso, and why it does not help here

A second proviso follows immediately, and it is often misread as softening the first. It does not.

Provided further that for the purpose of equal wages to all genders and for the purpose of payment of wages, the emoluments specified in sub-clauses (d), (f), (g) and (h) shall be taken for computation of wage.

That brings conveyance allowance, house rent allowance, remuneration under an award or settlement, and overtime allowance back into the computation, but only for two purposes: equal wages across genders, and payment of wages. It has nothing to say about the contribution base under Chapter III or Chapter IV, or about gratuity under Chapter V.

So there are, in effect, two wage figures. One for computing contributions and benefits, built on the first proviso. A wider one for equal-pay and payment-of-wages purposes, built on the second. Reading the second proviso as an exception to the first produces a number that is wrong for both.

6. Remuneration in kind, and the fifteen per cent limit

The Explanation to the second proviso of section 2(88) deals with payment in kind. Where an employee is given, in lieu of the whole or part of the wages payable to him, any remuneration in kind, the value of that remuneration in kind which does not exceed fifteen per cent of the total wages payable to him shall be deemed to form part of the wages.

Read literally, that deems only the portion at or below fifteen per cent to be wages, and it is easy to stop there and treat it as a rule in the employee’s favour: in-kind remuneration up to fifteen per cent counts for contribution. The commentary reads the provision as doing more. It treats the fifteen per cent as a limit on the employer rather than merely a threshold for the deeming. Where remuneration in kind exceeds fifteen per cent of the total wages payable, the excess is to be treated as part of the wages of the employee, with the consequence that an employer cannot in substance discharge more than fifteen per cent of the wage packet in kind. On that reading the Explanation is the second of two restrictions the new definition imposes, the first being the one-half rule in the first proviso.

That is a change of kind rather than of degree. The wage definitions in the Industrial Disputes Act, 1947, the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, the Employees’ State Insurance Act, 1948 and the Maternity Benefit Act, 1961 were all silent on what proportion of remuneration could be given in kind; they said only that remuneration included a concessional supply of food and other articles. Section 2(88) puts a limit on it for the first time.

7. What it changes, chapter by chapter

Because one definition now serves every chapter, a single change in the wage base moves several liabilities at once.

Chapter	What wages drives	Effect of the one-half proviso
III Provident fund	Contribution under section 16(1)(a), and the 8⅓% diverted to the Pension Fund	Higher base, subject to the ₹15,000 wage ceiling notified under section 2(89)
IV ESI	Contribution under section 29 at the Rule 19 rates	Higher base. The only section 2(89) ceiling notified so far is for Chapter III, and a Chapter IV ceiling would in any event work as a coverage line, above which the employer is not liable to contribute at all, rather than as a cap on the base
V Gratuity	Fifteen days’ wages, or such number of days as the Central Government notifies, for every completed year of service or part thereof in excess of six months, under section 53(2)	Higher base; no section 2(89) wage ceiling applies to the computation, though section 53(3) caps the amount of gratuity at such amount as the Central Government notifies
VI Maternity benefit	The average daily wage under section 60(1)	Higher base for the twenty-six week entitlement
VII Employee’s compensation	Monthly wages, computed by the method in section 78, feeding the compensation in section 76	Higher base for death and disablement compensation, but section 76(1) awards the higher of the multiplied figure and an amount the Central Government notifies, and section 76(3) lets it specify monthly wages for that purpose

The chapter where the effect is largest is gratuity, because the wage ceiling that dampens the provident fund result has no counterpart in the gratuity base. On a salary of ₹1,00,000 a month, split thirty-seventy in the same way and with none of the allowance side being dearness allowance, the gratuity computation moves from a base of ₹30,000 under section 2(s) of the Payment of Gratuity Act, 1972, which counted emoluments including dearness allowance but excluded bonus, commission, house rent allowance, overtime wages and any other allowance, to a base of ₹50,000. That is a two-thirds increase in the payout for every year of service, subject at the other end to the section 53(3) ceiling on the amount. Our note on gratuity under the Code works that through.

The provident fund effect is dampened but not removed: contributions are limited to the amount payable on the notified ceiling of ₹15,000 a month, so an employee already above the ceiling on the old base sees no change, while an employee below it may cross it. The detail is in our note on EPF under the Code.

The definition also matters outside the Code. Provident fund and gratuity figures feed the salary computation and the withholding that goes with it, so a change in the wage base flows through to quarterly returns. Taxmann’s eTDS Returns handles that end of the process.

8. What an employer cannot do about it

The obvious response to a higher contribution bill is to recover it from the employee, and section 124 forecloses it.

No employer in relation to an establishment to which this Code or any scheme framed thereunder applies shall, by reason only of his liability for the payment of any contribution under this Code, or any charges thereunder reduce whether directly or indirectly, the wages of any employee to whom the provisions of this Code or any scheme framed thereunder applies or the total quantum of benefits to which such employee is entitled under the terms of his employment, express or implied.

Two features of that drafting close the usual routes. It catches indirect reduction, so restructuring allowances rather than cutting basic pay does not escape it. And it reaches the total quantum of benefits, not merely wages, so trimming a non-wage benefit to fund the contribution is caught as well.

Section 124 corresponds to section 72 of the ESI Act, 1948 and section 12 of the EPF Act, 1952, and the two were not saying the same thing. Section 12 of the EPF Act protected the wages of an employee and “the total quantum of benefits in the nature of old age pension, gratuity, provident fund or life insurance” to which he was entitled, so gratuity was already named. Section 72 of the ESI Act was narrower on its subject-matter, protecting wages and, except as provided by the regulations, benefits payable under the conditions of service “which are similar to the benefits conferred by this Act”.

Section 124 takes the wider of the two formulations and applies it across the Code. Its trigger, though, is the employer’s liability for “any contribution under this Code, or any charges thereunder”, so it bites where a contribution or charge is the reason for the reduction rather than wherever any liability under the Code increases.

9. Frequently asked questions

What is the definition of wages under the Code on Social Security 2020?

Section 2(88) defines wages as all remuneration, whether by way of salaries, allowances or otherwise, expressed in money or capable of being so expressed, payable to a person employed in respect of his employment. It expressly includes basic pay, dearness allowance and retaining allowance, and excludes eleven heads listed in sub-clauses (a) to (k).

What is the 50 per cent rule in the new wage definition?

The first proviso to section 2(88) provides that where the payments made under sub-clauses (a) to (i) of the exclusion list exceed one-half of all remuneration, or such other percentage as the Central Government notifies, the amount exceeding that one-half is deemed to be remuneration and is added back into wages. Only the excess is added back, not the whole of the excluded allowances.

Is house rent allowance included in wages?

House rent allowance is excluded by sub-clause (f) of section 2(88), but it is one of the heads counted in the first proviso’s one-half test, so it can cause an add-back into wages. Separately, the second proviso brings house rent allowance into the computation of wage for two limited purposes only: equal wages to all genders, and payment of wages.

Are gratuity and retrenchment compensation counted in the 50 per cent test?

No. The first proviso applies to sub-clauses (a) to (i). Gratuity is excluded by sub-clause (j) and retrenchment compensation and other retirement benefits by sub-clause (k), and neither is counted in the one-half computation.

Does payment in kind count as wages?

Under the Explanation to the second proviso of section 2(88), where an employee is given remuneration in kind in lieu of the whole or part of his wages, the value of that remuneration in kind which does not exceed fifteen per cent of the total wages payable to him is deemed to form part of his wages. Read literally the Explanation deems only the portion at or below fifteen per cent to be wages. The commentary treats the figure as a limit on the employer as well: where remuneration in kind exceeds fifteen per cent of the total wages payable, the excess is to be treated as part of wages, so an employer cannot in substance discharge more than fifteen per cent of the wage packet in kind.

10. Conclusion

Section 2(88) is one definition doing what five used to do, and its first proviso puts a floor under the wage base at one-half of all remuneration. The three details that decide the number in practice are the ones most often lost: the proviso adds back only the excess, it runs on sub-clauses (a) to (i) rather than (a) to (k), and the one-half itself is movable by notification.

The effect is unevenly distributed. Provident fund is cushioned by the ₹15,000 wage ceiling; the gratuity base is not cushioned at all, though the amount finally payable remains subject to the ceiling in section 53(3). And section 124 closes the route by which an employer would ordinarily pass the increase back to the employee.

For section 2(88) printed against all five predecessor definitions in parallel columns, see Taxmann’s Law & Practice Relating to Code on Social Security.