Impact on Corporate Profits, ETCFO
Indian companies will be required to immediately expense higher gratuity and leave liabilities in profit and loss under Ind AS, as the New Labour Codes significantly expand the wage base and eligibility for employee benefits, according to accounting guidance issued by the Institute of Chartered Accountants of India.
The clarification, issued through a detailed set of FAQs on accounting implications of the New Labour Codes, removes uncertainty around whether the impact can be deferred, amortised or classified as actuarial remeasurement. The guidance states that changes arising from the Codes constitute plan amendments, triggering past service cost accounting.
“The increase in gratuity liability arising due to application of the New Labour Codes is a past service cost as this results in changes to the benefits payable under the plan.”
Wage definition reset lifts gratuity base to statutory minimum
One of the most consequential changes stems from the statutory requirement that wages must be at least 50 percent of total remuneration, comprising basic pay, dearness allowance and retaining allowance. Where wages fall short, they are deemed to be 50 percent by law, directly increasing gratuity calculations.
The Codes also expand eligibility by granting fixed-term employees gratuity rights after one year of service, while retaining the five-year requirement for permanent employees.
“Gratuity payment is required to be calculated on last drawn wages which should be minimum 50 percent of total remuneration.”
Ind AS mandates immediate P&L recognition
The ICAI FAQs draw a sharp distinction between Ind AS and Indian GAAP. Under Ind AS 19, all past service costs arising from plan amendments must be recognised immediately in the Statement of Profit and Loss. Under AS 15, vested past service costs are recognised immediately, while unvested costs may be amortised over the vesting period.
“Ind AS 19 requires past service cost to be immediately recognised as an expense.”
This makes the transition particularly earnings-sensitive for listed entities reporting under Ind AS.
Salary restructuring cannot be treated as actuarial gain or loss
The FAQs also address scenarios where companies restructure salary components to comply with the wage definition. Where increases are channelled disproportionately into basic pay, the resulting rise in gratuity obligation cannot be classified as actuarial remeasurement.
“The change in salary structure resulting from attribution of increase in salary entirely to basic salary is a plan amendment.”
Only changes relating to revised salary growth assumptions qualify as actuarial gains or losses.
December 2025 quarter must absorb impact
Despite the absence of notified Rules, the ICAI guidance states that entities cannot defer recognition once the Codes become effective. Companies with a March year-end must recognise the higher gratuity obligation in interim financial results for the quarter ended December 31, 2025.
“The increase in gratuity liability arising from the New Labour Codes needs to be recognised in interim financial statements.”
Earlier financials unaffected but disclosure mandatory
For reporting periods ending prior to November 21, 2025, the enactment of the Codes is treated as a non-adjusting event, as the obligation did not exist at the reporting date.
“The obligation arising from change in law was not existing on an earlier date and is therefore a non-adjusting event.”
However, entities must disclose the nature of the change and estimate the financial impact where possible.
Leave obligations also rise, with no amortisation option
The FAQs clarify that changes in leave encashment obligations, classified as short-term or other long-term employee benefits, must be recognised immediately, even under Indian GAAP.
“Any change in leave obligation arising from the New Labour Codes is recognised as an expense immediately.”
Exceptional item treatment allowed but not automatic
While the impact may be material and non-recurring, the ICAI cautions that materiality alone does not justify exceptional item classification. Companies must assess both nature and incidence before presenting the expense separately.
“All material items are not exceptional items.”
Deferred tax assets likely for unfunded plans
On taxation, the guidance confirms that no special tax deduction applies for increases arising from the New Labour Codes. Where deductions are available only on payment, companies may recognise deferred tax assets, subject to prudence under Ind AS 12 and AS 22.
“The amount deductible in future years results in recognition of deferred tax asset.”
Why this matters
The ICAI FAQs make one point clear. The New Labour Codes will translate into an immediate earnings impact, with limited flexibility on timing or classification. Gratuity and leave obligations now move from a long-term balance sheet consideration to a near-term profit and disclosure issue for CFOs and audit committees.
