FAQs on Accounting Impact of India’s New Labour Codes
FAQs on Accounting Impact of India’s New Labour Codes
The Government of India has merged 29 existing labour laws into four comprehensive Labour Codes, namely:
- Code on Wages, 2019
- Code on Social Security, 2020
- Industrial Relations Code, 2020
- Occupational Safety, Health and Working Conditions Code, 2020
(collectively referred to as the New Labour Codes)
These Codes have become effective from 21 November 2025. However, the detailed Rules are still awaited. This FAQ document explains the key accounting implications arising from these Codes, particularly in relation to gratuity and leave benefits, under Ind AS and Indian GAAP.
FAQ 1: How should an increase in gratuity liability due to the New Labour Codes be accounted for?
The New Labour Codes are expected to increase gratuity obligations mainly due to:
- Wage Definition Change
At least 50% of total remuneration must now be treated as “wages” (Basic Pay + Dearness Allowance + Retaining Allowance). If wages are below 50%, they are deemed to be 50% for statutory calculations. Gratuity must be computed on these revised wages. - Eligibility for Fixed-Term Employees
Fixed-term employees (including contract staff) become eligible for gratuity after one year of service, while the five-year requirement continues for permanent employees.
Accounting Treatment
Gratuity is a defined benefit obligation. Any increase arising due to the New Labour Codes represents a plan amendment, resulting in past service cost.
- Under Ind AS (Ind AS 19)
Past service cost must be recognised immediately as an expense in the Statement of Profit and Loss. - Under Indian GAAP (AS 15)
- For vested employees: expense recognised immediately
- For unvested employees: expense amortised over the remaining vesting period
👉 Accordingly, the increased gratuity liability must be charged to profit and loss as per the applicable standard.
FAQ 2: Can salary restructuring be treated as an actuarial gain or loss instead of past service cost?
If an entity revises its salary structure to comply with the New Labour Codes and simultaneously increases total remuneration, the impact needs to be analysed carefully.
Where the increase in gratuity liability arises from:
- Higher salary growth than earlier estimates → treated as a change in actuarial assumption
- Reallocation of salary components (e.g., higher basic pay) → treated as a plan amendment
Both components must be identified and accounted for separately.
📌 If there is no real increase in total salary and only restructuring is done to align with wage definitions, the entire increase in obligation is treated as past service cost.
FAQ 3: Should listed entities recognise the impact in quarterly results ending December 2025?
Although the Rules are pending, if legal interpretation indicates that the wage definition applies immediately from 21 November 2025, gratuity for employees exiting on or after this date must follow the new requirements.
Accounting Implication
As per Ind AS 34 / AS 25 (Interim Financial Reporting):
- Interim financial results must reflect year-to-date measurements
- Costs cannot be deferred unless deferral would also be appropriate at year-end
✔ Therefore, entities with a 31 March year-end must recognise the additional gratuity liability in Q3 results ending 31 December 2025.
FAQ 4: Is the impact an adjusting or non-adjusting event for earlier periods?
The enactment of the New Labour Codes represents a change in law effective from 21 November 2025.
- For financial statements ending before this date (e.g., 30 June, 30 September, or 31 March 2025), the impact is a non-adjusting event
- The obligation did not exist at the reporting date
Disclosure Requirement
Even though it is non-adjusting:
- Ind AS 10 / AS 4 require disclosure of:
- Nature of the event
- Estimated financial impact (if measurable)
FAQ 5: How should changes in leave encashment obligations be accounted for?
Leave encashment is classified as:
- Short-term employee benefit, or
- Other long-term employee benefit, depending on utilisation pattern
Accounting Treatment
Under both Ind AS 19 and AS 15:
- Past service cost relating to leave obligations must be recognised immediately
- AS 15 does not permit amortisation, even for unvested leave benefits
✔ Hence, any increase in leave liability due to the New Labour Codes is charged immediately to profit and loss.
FAQ 6: Can the additional expense be shown as an exceptional item?
While Schedule III permits disclosure of exceptional items, the term is not specifically defined.
An item may be presented separately if it:
- Is material in size or nature, and
- Arises from a non-recurring event, such as legislative change
📌 Since the increase arises due to new legislation, entities may evaluate — based on materiality — whether separate presentation is appropriate.
Regardless of presentation, adequate disclosures explaining the impact are essential.
FAQ 7: What are the tax implications (current and deferred)?
There are no special tax deductions for increases arising from the New Labour Codes. Existing tax provisions continue to apply:
Income Tax Treatment
- Contributions to approved gratuity funds → deductible on payment basis
- Unfunded gratuity provisions → deductible when gratuity becomes payable
- Leave encashment provision → deductible on actual payment
Deferred Tax Impact
- Expenses deductible in future years create deductible temporary / timing differences
- Subject to prudence, this may result in recognition of a Deferred Tax Asset under:
- Ind AS 12, or
- AS 22
📌 Conclusion
The New Labour Codes have significant accounting, disclosure, and tax implications, particularly for employee benefit obligations. Entities should proactively evaluate actuarial valuations, interim reporting impact, and disclosures to ensure compliance.
Comparative Table: Accounting Impact of New Labour Codes vs Earlier Provisions
| Particulars | Earlier Position (Pre–Labour Codes) | Position under New Labour Codes (Effective 21 Nov 2025) | Accounting Impact (Ind AS / Indian GAAP) |
|---|---|---|---|
| Definition of Wages | Basic Pay + DA generally formed a smaller portion of total remuneration | Minimum 50% of total remuneration deemed as wages (Basic + DA + Retaining Allowance) | Higher base for gratuity and leave calculations |
| Gratuity Base | Calculated on last drawn Basic + DA (often < 50%) | Calculated on last drawn wages, minimum 50% of total remuneration | Increase in defined benefit obligation |
| Gratuity Eligibility – Permanent Employees | Payable after 5 years of continuous service | No change – continues at 5 years | No change in vesting rules |
| Gratuity Eligibility – Fixed-Term / Contract Employees | Generally not eligible unless 5 years completed | Eligible after 1 year of service | New category of vested employees |
| Nature of Change | Existing benefit structure | Statutory enhancement of benefits | Plan amendment |
| Classification under Accounting Standards | Normal actuarial valuation | Past service cost due to plan amendment | Treated under AS 15 / Ind AS 19 |
| Past Service Cost – Ind AS | Recognised based on actuarial movements | Recognised immediately in P&L | Immediate expense recognition |
| Past Service Cost – Indian GAAP (AS 15) | Amortised for unvested benefits | Immediate recognition for vested employees; amortisation for unvested employees | Split treatment based on vesting |
| Salary Restructuring Impact | No statutory requirement | Restructuring to align wages ≥ 50% | Treated as plan amendment |
| Change in Salary Increase Assumptions | Actuarial assumption based | Any excess over expected increment | Actuarial gain / loss |
| Leave Encashment Obligation | Based on existing policy | Likely increase due to higher wage base | Immediate expense recognition |
| Treatment of Leave Past Service Cost | Recognised immediately | No amortisation permitted | Charged fully to P&L |
| Interim Financial Reporting | Normal YTD measurement | Impact to be recognised from Q3 FY 2025–26 | Cannot be deferred |
| Events After Reporting Period | No impact | Change in law effective 21 Nov 2025 | Non-adjusting event for earlier periods |
| Disclosure Requirement | Standard disclosures | Nature & financial impact to be disclosed | Mandatory disclosure |
| Exceptional Item Presentation | Limited use | Possible due to non-recurring legislative change | Subject to materiality |
| Tax Deduction – Gratuity | Allowed on payment basis | No change | Timing difference arises |
| Tax Deduction – Leave Encashment | Allowed on actual payment | No change | Deferred tax asset possible |
| Deferred Tax Impact | Limited | Increased deductible temporary differences | DTA subject to prudence |
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