The implementation of the new labour codes in India, effective from November 21, 2025, is poised to significantly impact companies' financial statements, particularly in the Q3 FY26. The Institute of Chartered Accountants of India (ICAI) has mandated that companies must recognize the increased costs associated with gratuity and leave encashment in their financial results for the quarter ending December 31, 2025. This directive stems primarily from the revised definition of "wages" under the new codes and the extended gratuity eligibility to fixed-term employees.

Key Changes and Their Implications

The new labour codes consolidate various existing labour laws into four comprehensive codes, streamlining regulations and aiming to enhance social security for workers. However, these changes also bring significant cost implications for employers.

• Redefined Wages: A pivotal change is the standardized definition of "wages," stipulating that basic pay, dearness allowance, and retaining allowance must constitute at least 50% of an employee's total remuneration. Previously, companies often structured salaries with a lower basic component and higher allowances to minimize social security contributions. Now, if allowances exceed 50% of the total remuneration, the excess amount is added back to wages for calculating statutory benefits like gratuity.
• Gratuity Eligibility for Fixed-Term Employees: Under the new codes, fixed-term employees (including those on contracts) are now eligible for gratuity after completing just one year of service, a significant reduction from the previous requirement of five years. This change expands gratuity coverage to a larger segment of the workforce.
• Gratuity Calculation: The formula for gratuity calculation remains largely unchanged: Gratuity = 15/26 × Eligible Salary × Years of Service. However, the "eligible salary" is now based on the redefined "wages," which, as explained above, could be higher than before. The maximum gratuity limit remains at ₹20,00,000.

Impact on Company Financials

The ICAI's mandate requires companies to treat any increase in gratuity liability as a "past service cost" and recognize it as an expense in their profit and loss statements immediately. This means companies cannot defer this expense and must reflect it in their Q3 FY26 results. This will particularly affect companies that previously structured salaries with lower basic pay and higher allowances. These companies will face:

• Increased Gratuity Payouts: Due to the revised definition of wages, the gratuity amount for eligible employees will likely increase.
• Higher Provident Fund (PF) Contributions: With a higher basic wage component, companies will also have to contribute more towards PF.
• Increased Leave Encashment Liabilities: Similar to gratuity, the increased wage base will lead to higher leave encashment payouts.
• Impact on Profitability: The immediate recognition of increased gratuity liability as an expense will likely weigh on the near-term profitability of companies.

Challenges and Considerations

Companies need to take several steps to ensure compliance and manage the financial impact:

• Update Gratuity Policies: Companies must update their gratuity policies to reflect the changes in eligibility and calculation methods, especially for fixed-term employees.
• Actuarial Valuations: Coordinate actuarial valuations to accurately calculate the increased gratuity liability.
• Payroll Restructuring: Validate payroll components against the new wage definitions and make necessary adjustments to basic pay, dearness allowance, and retaining allowance structures.
• Employee Communication: Communicate clearly with employees about the changes in gratuity policy and how it affects them.

The new labour codes represent a significant shift in India's labour law landscape. While they aim to enhance worker welfare and streamline regulations, companies need to proactively adapt to the changes to ensure compliance and mitigate the financial impact on their Q3 FY26 results and beyond.