Section 2 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
"Wages" and "average pay" drive the money side of the Industrial Relations Code, 2020: lay-off compensation, retrenchment compensation and other payments that depend on what a worker earns. Section 2(zq) defines wages and section 2(d) defines average pay. This article explains both, including the one-half rule that can pull excluded allowances back into wages.
Wages under s.2(zq) means all remuneration payable under the terms of employment and includes basic pay, dearness allowance and retaining allowance. It excludes items such as bonus, housing value, employer's pension or provident fund contribution, conveyance allowance, house rent allowance, overtime, commission and gratuity. But if the excluded payments under clauses (a) to (i) exceed one-half (or a notified percentage) of all remuneration, the excess is added back to wages. Average pay under s.2(d) is the average wages over three complete calendar months (monthly paid), four complete weeks (weekly paid) or twelve full working days (daily paid) before the date it becomes payable.
What counts as wages (s.2(zq))
Wages means all remuneration, whether by way of salary, 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 that employment. It includes:
- basic pay;
- dearness allowance; and
- retaining allowance, if any.
What is excluded
| Clause | Excluded item |
|---|---|
| (a) | Any bonus payable under any law, which does not form part of the remuneration payable under the terms of employment |
| (b) | Value of house accommodation, light, water, medical attendance or other amenity, or any service excluded by a general or special order of the appropriate Government |
| (c) | Employer's contribution to any pension or provident fund, and interest accrued on it |
| (d) | Conveyance allowance or value of any travelling concession |
| (e) | Any sum paid to defray special expenses entailed by the nature of the employment |
| (f) | House rent allowance |
| (g) | Remuneration payable under any award or settlement or order of a court or Tribunal |
| (h) | Any overtime allowance |
| (i) | Any commission payable to the employee |
| (j) | Any gratuity payable on termination of employment |
| (k) | Any retrenchment compensation or other retirement benefit, or any ex gratia payment on termination |
The one-half rule (first proviso)
For calculating wages, if the payments made by the employer under sub-clauses (a) to (i) exceed one-half, or such other per cent. as the Central Government notifies, of all remuneration calculated under this clause, the amount that exceeds that one-half (or the notified per cent.) is deemed to be remuneration and is added to wages.
Note that the proviso lists (a) to (i). Clauses (j) and (k), gratuity and termination benefits, stay out regardless of the proportion.
Illustration (figures are invented for the example only). Suppose a worker's monthly remuneration is Rs 100 in total (a round number chosen for ease): basic pay and dearness allowance Rs 40 and payments under clauses (a) to (i) Rs 60. One-half of Rs 100 is Rs 50; the payments exceed it by Rs 10. That Rs 10 is added, so wages for the purposes of the clause become Rs 50. This assumes that "all remuneration" means everything payable, whether or not it is excluded by clauses (a) to (i). If you run payroll, confirm that reading for your structure before relying on it. See our payroll compliance audit service, which reviews salary structures against wage definitions.
The second proviso: equal wages and payment of wages
For the purpose of equal wages to all genders and for the purpose of payment of wages, the emoluments in sub-clauses (d), (f), (g) and (h) (conveyance allowance, house rent allowance, award or settlement remuneration, overtime) are taken for computation of wage. So for those two purposes the exclusion does not apply to those four items.
Explanation: wages in kind
Where an employee is given, in lieu of the whole or part of wages, remuneration in kind, the value of that remuneration in kind which does not exceed fifteen per cent. of the total wages payable forms part of the wages. The text limits the deemed inclusion to in-kind remuneration within that fifteen per cent.
Average pay (s.2(d))
Average pay means the average of the wages payable to a worker:
| Type of worker | Period averaged |
|---|---|
| Monthly paid | Three complete calendar months |
| Weekly paid | Four complete weeks |
| Daily paid | Twelve full working days |
The period is the one preceding the date on which the average pay becomes payable, provided the worker had worked for three complete calendar months, four complete weeks or twelve full working days, as the case may be. Where that calculation cannot be made, average pay is the average of the wages payable to the worker during the period he actually worked.
Because average pay is built from "wages payable", the s.2(zq) definition (including the exclusions and the one-half rule) feeds directly into it.
Where average pay is used
- Retrenchment. Section 70 makes a retrenchment conditional on, among other things, compensation equivalent to fifteen days' average pay (or average pay of such days as the appropriate Government notifies) for every completed year of continuous service or any part thereof in excess of six months. See section 70 and the conditions precedent to retrenchment.
- Lay-off. Section 67 measures lay-off compensation differently: fifty per cent. of the total of the basic wages and dearness allowance that would have been payable, for each day of lay-off except intervening weekly holidays. It does not use average pay. See section 67.
- The Code has other provisions that refer to wages or average pay; where an article in this cluster deals with them it quotes the section.
For the tax side of retrenchment compensation, see our note on tax on retrenchment compensation and the income-tax guides.
Example. A monthly paid worker is retrenched after eight years and seven months of continuous service. Under s.70(b) compensation is fifteen days' average pay for every completed year or any part in excess of six months: that is nine years' worth, because seven months is a part of a year in excess of six months. Average pay is taken from the three complete calendar months before the date it becomes payable.
Need help reading your salary structure against the definition?
A salary built mostly of allowances can carry more "wages" than the payslip suggests, which changes compensation and other payments. Our payroll compliance audit team can test your structure against s.2(zq) and the one-half rule and flag components that drift into wages. Bring a sample payslip for each grade.
Key takeaways
- Wages include basic pay, dearness allowance and retaining allowance; clauses (a) to (k) list what is excluded.
- If payments under (a) to (i) exceed one-half (or a notified per cent.) of all remuneration, the excess is added to wages.
- For equal wages to all genders and for payment of wages, items (d), (f), (g) and (h) are brought into the computation.
- Wages in kind count up to fifteen per cent. of total wages.
- Average pay uses three months, four weeks or twelve days depending on how the worker is paid.
Read next
- Definitions of lay-off, closure, retrenchment, strike and lock-out
- Section 67: rights of laid-off workers to compensation
- Retrenchment compensation: formula and examples
- Payment of wages under the new labour codes
Disclaimer: Based on the Industrial Relations Code, 2020 (as enacted) and, where noted, the Industrial Relations (Central) Rules, 2026 (G.S.R. 342(E), 8 May 2026), as on 30 September 2026. The Code is in force from 21 November 2025; some provisions may be notified later, and State Governments make their own rules for establishments where the State is the appropriate Government. Verify the current position before acting.