The financial results for the December 2025 quarter will reflect the first tangible impact of India's new labour codes, with companies across sectors expected to report higher provisions for employee gratuity. This shift follows the official implementation of the codes on November 21, 2025, forcing a significant accounting realignment.
Accounting Adjustments and Compliance Mandate
According to Kuldip Kumar, a partner at Mainstay Tax Advisors, companies must now update their gratuity liability provisions in accordance with Ind AS 19. This involves recognising past service liabilities that arose when the new codes became effective. Many organisations are currently securing actuarial valuations to accurately adjust, or "true up," their provisions, with the financial effect likely visible in the upcoming quarterly reports.
Kumar further clarified that if a company chooses not to perform this true-up exercise, it must provide a formal disclosure explaining the omission, unless the financial impact is deemed immaterial. Auditors have indicated to TOI that while some firms will see a direct effect on their bottom line, others may use this as a routine opportunity to update their accounting provisions.
Redefining Wages: The Core Change
The central change driving this accounting shift is the new definition of 'wages' under the labour codes. At least 50% of an employee's total earnings must now be classified as basic salary and dearness allowance. Gratuity contributions must be calculated based on this enlarged base, which could substantially increase the liability for many employers.
Amarpal Chadha, a partner at EY India, stated that companies are actively evaluating the impact of this revised wage definition on their quarterly accounts. This assessment considers not just the codes themselves but also related FAQs from the labour ministry and guidelines from the Accounting Standards Board of the ICAI.
Variable Impact and Excluded Components
The extent of the financial hit will not be uniform. Kuldip Kumar explained that the impact depends heavily on a company's existing compensation structure. Organisations where excluded allowances traditionally constituted more than 50% of the total cost to company (CTC) will face a steeper rise in gratuity provisions. Additionally, the codes have made fixed-term employees eligible for gratuity after just one year of service, adding to the liability for firms employing such workers.
However, the draft rules for calculating gratuity also specify numerous exclusions. Items such as performance bonuses, stock option benefits, telephone and internet reimbursements, medical reimbursements, creche allowances, and meal voucher values are not to be included in the wage definition for gratuity. This means companies with a high proportion of such allowances in their pay structure may successfully avoid a massive spike in their gratuity liability.
Ultimately, the companies that will need to make the highest additional provisions are those that were not strictly adhering to the 50% formula for basic wages in the past. The new rules have now made this stipulation explicit and mandatory, closing previous avenues for interpretation.
