From 1 April 2026, a sweeping set of reforms to India's labour and tax laws will come into full effect - reshaping everything from how salaries are structured to how long an employer can legally hold your final dues. Here is what every working Indian needs to know.
Your Pay Slip Is About to Look Very Different
For decades, Indian companies kept the basic salary component artificially low, often between 25% and 40% of total pay, a tactic that minimised contributions to the Employees' Provident Fund (EPF) and gratuity, and kept take-home pay higher. That practice is now over.
Under the Code on Wages, 2019, one of four consolidated Labour Codes that came into force on 21 November 2025, a uniform definition of "wages" has been introduced. Basic pay, Dearness Allowance (DA), and retaining allowance must together form at least 50% of an employee's total cost to company (CTC). Since DA and retaining allowance are uncommon in the private sector, most companies will be required to raise basic pay to meet this threshold. If allowances still exceed 50% after restructuring, the excess will automatically be counted as wages for statutory purposes.
The rule applies universally to every establishment in India, regardless of sector or size, from a 15-person startup to a 50,000-strong conglomerate.
More for Retirement, Less in Hand, At Least Initially
The knock-on effect of a higher basic salary is significant. Since EPF contributions and gratuity are calculated as a percentage of basic wages, both will rise.
For employees, this means monthly take-home pay could dip slightly in the short term. But the trade-off is a substantially larger retirement corpus: higher EPF contributions compound over years into meaningful long-term savings. Gratuity payouts at the time of exit will also be higher, given that gratuity is calculated on the last drawn basic pay.
Employers, too, will feel the impact. Industry compliance analysts estimate the reform will increase statutory costs, PF and gratuity combined, by 5-15% for most organisations. Companies in IT, retail, BPO, and hospitality, which have historically kept basic salaries lean, will feel the change most acutely.
Quitting Your Job? You Will Get Your Dues in Two Days
Perhaps the most immediately employee-friendly reform is the dramatic compression of the Full and Final (F&F) settlement timeline. Under the old system, departing employees routinely waited anywhere from 30 to 90 days to receive pending salary, leave encashment, and other dues. The experience often caused financial distress, particularly for those moving between jobs.
Under Section 17(2) of the Code on Wages, 2019, companies must now clear all wage-related dues within two working days of an employee's last working day, whether they resigned, were retrenched, dismissed, or otherwise separated. Delayed settlement is no longer just poor practice; it is a legal violation, and employees can approach state Labour Departments to seek redress and interest on delayed payments.
It is worth noting that gratuity, which has its own statutory timeline of 30 days under the Payment of Gratuity Act, and EPF transfers, which follow separate EPFO processes, are not covered by this two-day rule.
India's 65-Year-Old Tax Law Is Retiring
On 1 April 2026, the Income Tax Act, 1961, in force for over six decades and expanded through thousands of amendments into a labyrinthine document of more than 800 sections, will be replaced by the new Income Tax Act, 2025.
The new law, which received Presidential assent in August 2025, does not change tax rates or most deductions. What it does is rewrite the law in clearer language, reduce sections from 819 to 536, and cut the number of chapters from 47 to 23. The aim, as the government puts it, is to make compliance less dependent on specialist interpretation and more accessible to ordinary taxpayers.
One important transition point: income earned up to 31 March 2026 remains governed by the 1961 Act. The new Act applies only to income earned from 1 April 2026 onwards. Pending assessments, appeals, and proceedings under the old law will continue under the old law until resolved.
Goodbye 'Assessment Year', Hello 'Tax Year'
One of the most confusing features of the old tax system was the distinction between the Previous Year (when income was earned) and the Assessment Year (when returns were filed and tax was assessed). The gap between the two often led to genuine confusion among taxpayers.
The new Act eliminates both terms and replaces them with a single concept: the Tax Year. Income earned between 1 April 2026 and 31 March 2027 will simply be referred to as Tax Year 2026-27. This is the same year in which returns are eventually filed, no more mental arithmetic about which year is which.
Travelling Abroad? A Major Relief on Upfront Tax
International travellers and families funding education or medical treatment overseas will benefit significantly from a change in Tax Collected at Source (TCS) rates, announced in the Union Budget 2026 and effective from 1 April.
Previously, TCS on overseas tour packages was levied at 5% on amounts below ₹7 lakh and a steep 20% on amounts above that threshold. From 1 April, a flat rate of 2% applies uniformly, with no minimum threshold. The same simplified rate applies to foreign remittances for education and medical treatment under the Reserve Bank of India's Liberalised Remittance Scheme (LRS) for amounts exceeding ₹10 lakh.
The change does not reduce the ultimate tax liability, TCS is an advance tax, credited against final dues at the time of filing. What it does reduce is the amount of money locked up upfront, improving cash flow for travellers, students, and their families. Tour operators had reported a significant drop in bookings after the higher 20% rate came into effect in late 2025.
Sovereign Gold Bonds: A Targeted Tax Change
Investors in Sovereign Gold Bonds (SGBs) will need to take note of a significant tax treatment change.
Until now, capital gains at maturity on SGBs were fully tax-free, regardless of whether the bonds were bought during a primary issuance from the Reserve Bank of India, or purchased later from the secondary market.
From 1 April, this exemption is restricted to investors who subscribed directly through the RBI during primary issuance. If you hold SGBs bought from a stock exchange, capital gains at maturity will now be taxed, either at 12.5% as long-term capital gains (depending on holding period) or as short-term capital gains added to your income.
More Time to Fix Filing Errors But at a Price
The window to file a revised income tax return is being extended from 9 months to 12 months from the end of the tax year, giving taxpayers three extra months to correct omissions and errors.
However, there is a catch: filing a revised return after the 9-month mark will now attract a fee, even though the window remains open. Taxpayers who wish to revise without any additional cost must continue to do so within the existing 9-month period.
What This Means for You At A Glance
- Salaried employees: Expect higher EPF deductions and a possible small reduction in monthly take-home pay. Long-term retirement savings will grow.
- Job changers: Your final dues must reach you within two working days of leaving.
- Taxpayers: The new Income Tax Act simplifies language and structure, but does not change rates or most deductions.
- Overseas spenders: TCS on travel and education remittances drops sharply to a flat 2%.
- SGB investors (secondary market): Capital gains at maturity will now be taxed.
- Derivatives traders: Slightly higher transaction costs from 1 April.
- Tax filers: An extended window to revise returns, but with a fee beyond 9 months.
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