New Labour Code 2025: Working hours & tax implications

The New Labour Code 2025 introduces the possibility of a 4-day workweek, sparking widespread discussion about its practical effects on employee finances. However, it is critical to note that the total working hours per week remain capped at 48 hours, as per the Occupational Safety, Health and Working Conditions Code, 2020. Employers may now structure these 48 hours over four 12-hour days, rather than the conventional five or six shorter days.

While this change enhances scheduling flexibility, it has significant implications for salary structuring and tax application, particularly in the way earnings are computed and taxed.

Working hours under the new regime:

• 48-Hour weekly cap remains: The law permits compressed workweeks but not a reduction in total weekly working time.
• Overtime applicability: Any hours worked beyond the daily or weekly statutory limit will attract overtime pay, as prescribed by law.
• Employer discretion: Implementation of a 4-day week is optional and subject to employer-employee agreement.

Tax implications: Salary & TDS impact

Though the New Labour Code does not amend the Income-tax Act, 1961, changes in working hours and pay structure can influence how tax is calculated and deducted:

1. Higher PF contributions, lower take-home pay:

• Increased PF contributions arising from restructuring under the Wage Code may reduce net salary, affecting disposable income.
• Although the employee receives less cash-in-hand, the taxable base may also decrease proportionately.

2. Overtime payments are fully taxable:

• Longer working days may lead to more frequent overtime payouts, especially if employees cross daily thresholds.
• Overtime is treated as fully taxable salary under Section 17(1) and must be included in TDS computation each month.

3. Fluctuating monthly income affects TDS projections:

• Variable pay structures, like shift allowances or overtime, could lead to month-on-month variation in gross salary, complicating monthly TDS deduction.

The New Labour Code’s provision for a 4-day workweek does not reduce total working hours

but restructures raising payroll and tax implications. Employers and payroll teams must reassess salary components, overtime tracking, and TDS calculations to ensure both compliance and clarity for employees. For workers, understanding how altered pay structures affect monthly take-home and tax liabilities will be critical in navigating the shift.