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.
The word "wages" drives every contribution and benefit calculation under the Code on Social Security, 2020. Section 2(88) gives one definition for the whole Code, with a list of inclusions, a list of exclusions and two provisos that can pull excluded pay back in. This article covers the definition with the clauses around it: contribution (s.2(21)), wage ceiling (s.2(89)), completed year of service (s.2(17)), retirement (s.2(70)), superannuation (s.2(82)) and compensation (s.2(15)).
Wages means all remuneration that would be payable if the terms of employment were fulfilled, and includes basic pay, dearness allowance and retaining allowance. Eleven items are excluded (for example bonus, HRA, overtime, commission, gratuity and employer PF contribution). But if payments under exclusions (a) to (i) exceed one-half, or another percentage the Central Government notifies, of total remuneration, the excess is added back to wages. Remuneration in kind counts as wages up to fifteen per cent. of total wages.
Section 2(88): what wages include and exclude
| Included | Excluded |
|---|---|
| (a) Basic pay | (a) Bonus payable under any law that does not form part of the remuneration under the terms of employment |
| (b) Dearness allowance | (b) Value of house-accommodation, supply of light, water, medical attendance or other amenity, or service excluded by general or special order of the appropriate Government |
| (c) Retaining allowance, if any | (c) Employer's contribution to any pension or provident fund, and interest accrued |
| (d) Conveyance allowance or value of any travelling concession | |
| (e) Sum paid to defray special expenses entailed by the nature of employment | |
| (f) House rent allowance | |
| (g) Remuneration payable under an award or settlement or an order of a court or Tribunal | |
| (h) Overtime allowance | |
| (i) Commission payable to the employee | |
| (j) Gratuity payable on termination of employment | |
| (k) Retrenchment compensation or other retirement benefit, or ex gratia payment on termination, under any law in force |
The one-half rule
The first proviso says: for calculating wages, if payments by the employer under sub-clauses (a) to (i) of the exclusions exceed one-half, or such other per cent. as the Central Government notifies, of all remuneration calculated under the clause, the amount above that share is deemed remuneration and added to wages.
The second proviso says that for the purpose of equal wages to all genders and for payment of wages, the emoluments in exclusions (d), (f), (g) and (h) (conveyance allowance, house rent allowance, award or settlement remuneration and overtime) are taken for computation of wage.
The Explanation says that where an employee receives, in place of the whole or part of wages, remuneration in kind, its value counts as part of wages if it does not exceed fifteen per cent. of the total wages payable.
Worked example. An employee's monthly remuneration is: basic pay 30,000, dearness allowance 5,000, HRA 20,000, conveyance allowance 5,000, commission 10,000 (total 70,000). Excluded items in (a) to (i) total 35,000 (HRA, conveyance, commission), which is exactly one-half of 70,000, so nothing is added back and wages are 35,000. If the employee instead received HRA 30,000, total remuneration would be 80,000 and one-half would be 40,000; the excluded items would total 45,000, so the 5,000 excess is added to wages, making wages 40,000. The one-half share is the Code's default; use the percentage the Central Government notifies if it has notified another.
Payroll teams should test each salary structure against this rule. Our payroll compliance audit service reviews structures against the definition. The wage-related provisions of the Code on Wages, 2019 are a separate statute; see our post on payment of wages under the new Labour Codes for that side.
Wage ceiling and who falls within it: s.2(89)
"Wage ceiling" means such amount of wages as may be notified by the Central Government, for the purposes of becoming a member under Chapter III (EPF) and Chapter IV (ESI). The definition contains no figure. The ceiling operates through the employee definition in s.2(26): for Chapter III (except the EPF Scheme) and Chapter IV, an employee is one drawing wages up to the ceiling, while higher-paid employees are still counted for establishment coverage. See the employee definition. Check the current notification for the amount.
Contribution: s.2(21)
"Contribution" means the sum of money payable by the employer, under the Code, to the Central Board and to the Corporation, as the case may be, and includes any amount payable by or on behalf of the employee under the Code. So one defined word covers both the employer's and the employee's share for EPF and ESI. The rates are not in the definition; see sections 17 to 19 for EPF and sections 28 and 29 for ESI.
Service and exit terms
| Clause | Term | Meaning |
|---|---|---|
| 2(17) | Completed year of service | Continuous service for twelve months |
| 2(70) | Retirement | Termination of the service of an employee otherwise than on superannuation |
| 2(82) | Superannuation | Attainment by the employee of the age fixed in the contract or conditions of service at which he shall vacate employment; for Chapter III, the age of superannuation is fifty-eight years |
| 2(15) | Compensation | Compensation as provided under Chapter VII |
The phrase "completed year of service" feeds the gratuity provisions; the detailed rule on continuous service is in section 54 and is covered there, not in the definition. Our existing post on gratuity eligibility under the old Act gives the background.
Need help testing your salary structure?
If your pay components lean heavily on allowances, the one-half rule can raise the wage base for contributions and benefits. Our payroll compliance audit team can test your structure against s.2(88) and the wage ceiling notification. Bring a sample payslip for each grade.
Key takeaways
- Wages include basic pay, dearness allowance and retaining allowance.
- Eleven components are excluded, but the one-half rule adds excess excluded pay back to wages.
- The one-half share can be replaced by a percentage the Central Government notifies.
- In-kind remuneration counts up to fifteen per cent. of total wages.
- The wage ceiling is notified, not fixed in the Code, and determines who is an employee for Chapters III and IV.
- Completed year of service means twelve months of continuous service; Chapter III superannuation age is fifty-eight.
Read next
- Section 2: definitions of employee, employer and contract labour
- Sections 17 to 19: contribution, tax status and priority of PF dues
- Section 54: continuous service and calculation of gratuity
- Key definitions under the EPF Act: employee, employer, basic wages
Disclaimer: Based on the Code on Social Security, 2020 (as enacted) and, where noted, the Code on Social Security (Central) Rules, 2026 (G.S.R. 344(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.