Labour code: Companies' Q3 numbers to reflect higher gratuity

NEW DELHI: The first impact of the labour codes will be felt in the December quarter results with companies making higher provision for gratuity.

"Companies will need to update their gratuity liability provisions in line with Ind AS 19, recognising past service liabilities as the new labour codes came into effect on Nov 21, 2025. Many companies are in the process of obtaining actuarial valuations to true up their gratuity liability provisions, and the impact may be reflected in the Dec quarterly results. If such a true-up is not performed, companies may provide a disclosure explaining why it was omitted unless the impact is immaterial," said Kuldip Kumar, partner at Mainstay Tax Advisors, a consulting company.

Auditors told TOI that there may be some impact on the bottom lines of some of the companies, while some others may use the opportunity to update their provisions.

"Companies are evaluating the impact of the change in definition of wages and the impact on the provisions required in the quarterly accounts, in view of the labour codes, FAQs issued by the labour ministry and the Accounting Standards Board of the ICAI," added Amarpal Chadha, partner at consulting firm EY India.

Under the new law, at least half the earnings of an employee will be treated as basic salary and dearness allowance and companies will have to provide gratuity based on that. "The extent of the impact will depend on the existing compensation structure, for example, where excluded allowances exceed 50% of salary or the number of fixed-term employees, who now become eligible for gratuity after one year of service," said Kumar.

Besides, he said, according to draft rules for the new labour codes for calculating gratuity, items such as performance bonuses, stock option benefits, telephone, internet and medical reimbursements, creche allowance, and the value of meal vouchers are excluded. Therefore, it will not be surprising if some organisations can dodge the big jumps in gratuity liability.

Higher provisions will be required by companies that did not always stick to the 50% gratuity formula as the rules have now categorically provided for the payment.

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