Impact of Labour Codes on Gratuity Provisions: What Companies Should Know

The recent implementation of the new labour codes is set to have significant implications for businesses in India, particularly regarding their gratuity provisions.

Gratuity Liability Adjustments

With the labour codes now in effect as of November 21, 2025, companies are required to update their gratuity liability provisions to comply with Ind AS 19. This includes recognizing past service liabilities, which is crucial for accurate financial reporting. Kuldip Kumar, a partner at Mainstay Tax Advisors, notes that many companies are currently assessing their gratuity liability through actuarial valuations, and the effects will likely be evident in the upcoming December quarter results.

Financial Implications for Companies

Auditors have indicated that some companies may experience changes in their bottom lines as they reassess their gratuity obligations. Certain organizations might take this opportunity to align their financial statements with the updated labor regulations.

Evaluating Wage Definitions

Companies must also scrutinize the modified definitions of wages that accompany the new labour codes. According to Amarpal Chadha, a partner at EY India, this will affect the required provisions in quarterly accounts. Gratuity is now mandated based on at least half of an employee’s earnings classified as basic salary and dearness allowance.

Factors Influencing Gratuity Calculations

The impact of the new rules will vary depending on various factors, including the existing compensation structures within organizations. For example, if excluded allowances surpass 50% of an employee’s salary, or if there is an increase in the number of fixed-term employees—who now qualify for gratuity after one year of service—the financial ramifications could be notable.

Exclusions from Gratuity Calculation

According to the draft rules associated with the new labour codes, certain items—including performance bonuses, stock options, and various reimbursements (such as medical bills or meal vouchers)—are excluded when calculating gratuity. As such, some companies may manage to avoid substantial increases in gratuity liabilities, provided they have not deviated significantly from the 50% gratuity formula mandated by the new regulations.

Conclusion

In summary, the introduction of the new labour codes will necessitate increased provisions for gratuity for many companies, especially those that have not yet aligned their practices with the updated criteria. As businesses navigate these changes, a thorough understanding of the implications will be essential for compliance and financial planning.