Is “Special Allowance” Wages under Section 2(y) of the Code on Wages, 2019?

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Is “Special Allowance” Wages under Section 2(y) of the Code on Wages, 2019?

A Statutory, Practical and Judicial Analysis



1. Introduction

With the enforcement of the Code on Wages, 2019, one of the most frequently asked—and litigated—questions in payroll and compliance is:

Whether “Special Allowance” forms part of “wages” under Section 2(y)?

For decades, employers structured salaries by artificially inflating allowances to reduce statutory liabilities under PF, ESI, Bonus, and Gratuity laws. The Code on Wages decisively addresses this practice by introducing a uniform and anti-avoidance definition of wages, applicable across all four Labour Codes.

This article examines:

  • the statutory definition,

  • the 50% proviso,

  • the legal status of Special Allowance,

  • practical illustrations, and

  • judicial principles supporting inclusion.

2. Statutory Definition of “Wages” – Section 2(y)

Section 2(y), Code on Wages, 2019 states:

“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 were fulfilled, be payable to a person employed…”

The definition specifically includes:

  • (i) Basic Pay

  • (ii) Dearness Allowance

  • (iii) Retaining Allowance

and excludes certain payments such as:

  • HRA

  • Conveyance allowance

  • Employer’s PF contribution

  • Overtime allowance

  • Bonus

  • Commission

  • Gratuity and retrenchment compensation

Key Observation

👉 “Special Allowance” is not listed in the exclusions.

Therefore, by default, Special Allowance is covered under the phrase:

“all remuneration whether by way of salaries, allowances or otherwise”.

3. The First Proviso – The 50% Rule (Anti-Avoidance Mechanism)

The most critical provision is the First Proviso to Section 2(y):

“Provided that if the payments made by the employer to the employee under the excluded heads exceed fifty per cent of the total remuneration, the amount exceeding such fifty per cent shall be deemed to be wages and shall be added back.”

Legislative Intent

This proviso is designed to:

  • prevent splitting of wages into artificial allowances,

  • nullify cosmetic salary structuring,

  • ensure social security is calculated on a realistic wage base.

4. Legal Status of “Special Allowance”

Is Special Allowance expressly excluded?

No.

Is Special Allowance automatically wages?

Not always—but very often, yes.

The legal test is not the name, but the nature, universality, and purpose of payment.

5. Substance over Form – Governing Legal Principle

Indian labour jurisprudence consistently follows the principle:

“Nomenclature is irrelevant; substance prevails over form.”

If a payment:

  • is fixed,

  • paid monthly,

  • paid to all employees uniformly,

  • and not linked to any specific contingency,

it constitutes wages, irrespective of being called “Special Allowance”.

The Code on Wages now statutorily incorporates this principle through the 50% proviso.

6. Practical Examples

Example 1: Special Allowance Treated as Wages

Salary Structure

ComponentAmount (₹)
Basic20,000
DA5,000
HRA10,000
Special Allowance15,000
Gross50,000

Analysis

  • Basic + DA = ₹25,000 (50%)

  • Excluded components = ₹25,000 (50%)

👉 This structure barely survives the 50% test.
Any future increase in allowances will automatically convert excess Special Allowance into wages.

Example 2: Excess Allowance Added Back as Wages

ComponentAmount (₹)
Basic15,000
DA5,000
HRA10,000
Special Allowance20,000
Gross50,000

  • Basic + DA = ₹20,000 (40%)

  • Exclusions = ₹30,000 (60%)

👉 Excess 10% (₹5,000) deemed as wages by law
👉 PF, Bonus, Gratuity must be recalculated on ₹25,000

Example 3: When Special Allowance May Remain Excluded

If Special Allowance is:

  • performance-linked,

  • role-specific,

  • conditional,

  • non-universal,

and total exclusions remain within 50%,
it may remain excluded, subject to facts and documentation.

7. Judicial Support (Pre-Code but Fully Relevant)

Though delivered under PF law, the following Supreme Court judgments form the foundation of the Code on Wages:

🔹 Surya Roshni Ltd. v. EPFO (2019)

The Court held that:

  • allowances paid universally and regularly

  • form part of basic wages.

🔹 Manipal Academy of Higher Education v. PF Commissioner (2008)

The Court rejected artificial splitting of wages into allowances.

👉 The Code on Wages codifies these rulings, leaving minimal scope for evasion.

8. Impact Across Labour Codes

Because the definition of wages is uniform across all four Codes, inclusion of Special Allowance impacts:

  • Provident Fund (Social Security Code)

  • ESIC

  • Bonus

  • Gratuity

  • Leave encashment

  • Retrenchment compensation

9. Compliance Best Practices for Employers

✔ Maintain Basic + DA ≥ 52–55% of gross
✔ Avoid “Special Allowance” as a dumping head
✔ Clearly document purpose of allowances
✔ Do not bifurcate minimum wages
✔ Ensure consistency across employee categories

10. Conclusion

Special Allowance is not excluded by law. If it is fixed, universal, and used to suppress basic pay, it is wages in the eyes of Section 2(y), regardless of its label.

The Code on Wages shifts compliance from creative structuring to statutory substance. Employers must realign compensation philosophy with social security intent, not merely payroll convenience.

Author’s Note (Optional for Publication)

This article is intended for HR professionals, compliance officers, payroll heads, consultants, and employers navigating the transition to India’s New Labour Codes.


Footnotes

  1. Section 2(y), Code on Wages, 2019.

  2. Section 2(y)(a)–(k), Code on Wages, 2019.

  3. First Proviso to Section 2(y), Code on Wages, 2019.

  4. Ibid. (Deeming fiction under proviso).

  5. Surya Roshni Ltd. v. EPFO, (2019) 2 SCC 770.

  6. Manipal Academy of Higher Education v. PF Commissioner, (2008) 5 SCC 428.

  7. Section 2(78), Code on Social Security, 2020 (adopting same wage definition).

  8. Section 6 & 7, Code on Wages, 2019 (minimum wages to be paid as basic + DA)


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📢 Seminar Announcement | Mumbai Chapter 2

Compliance Monk is pleased to announce a full-day, in-depth professional seminar on India’s New Labour Codes, curated specifically for HR leaders, compliance professionals, IR managers, consultants, and business owners.

🎓 Seminar on India’s New Labour Codes

“I Am Ready | Labour Code | Seminar ” Series – Mumbai Chapter 2

📅 Date: 17 January 2026
📍 Venue:
Thakur College of Engineering & Technology
Kandivali East, Mumbai

⏰ Time: 10:00 AM – 5:00 PM

🔍 Seminar Focus

  • Comprehensive understanding of the Four New Labour Codes

  • Practical interpretation of statutory provisions

  • Salary structuring & wage compliance under the Code on Wages

  • Social Security, IR, and OSH compliance transition

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  • Interactive Q&A with subject-matter experts

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See you soon.

—
Team Compliance Monk

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