ICAI ASB Issues FAQ on Accounting Impact of New Labour Codes

1. Introduction

The Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) has issued a set of Frequently Asked Questions (FAQs) to provide clarity on the key accounting implications arising from the implementation of the New Labour Codes. These FAQs address important questions relating to the recognition, measurement, presentation and disclosure of employee benefit obligations, particularly gratuity and leave encashment, under Ind AS and Indian Generally Accepted Accounting Principle (GAAP).

2. Impact of New Labour Codes on Gratuity

The “New Labour Codes” have subsumed the Payment of Gratuity Act, 1972 and introduced certain important changes in the computation and eligibility of gratuity. Under the revised framework, gratuity is required to be calculated based on the employee’s last drawn wages, with wages constituting a minimum of 50% of the total remuneration.

While the general requirement of completion of five years of continuous service for entitlement to gratuity continues to apply to permanent employees, a significant change has been introduced for fixed-term employees, including contractual employees. Such employees will now be eligible for gratuity upon completion of one year of service. Thus, the government has expanded the social security coverage to a broader category of employees.

3. Accounting Implications on Issuance of New Labour Codes

The issuance of the “New Labour Codes” represents a major regulatory development with direct implications on accounting for employee benefit obligations. Changes in wage definitions and eligibility criteria for benefits such as gratuity and leave encashment are expected to increase employee related liabilities for many entities. Given the effective date of the codes and the absence of detailed Rules, entities are required to carefully assess the timing of recognition, measurement and presentation of the additional obligations under Ind AS and Indian GAAP, along with the related tax implications. Thus, the FAQ issued by ASB of ICAI would be pivotal to understand the accounting implications of codes. The FAQ covers the following topics:

4. Topics Covered under FAQ

The issuance of the New Labour Codes has given rise to several important accounting considerations in relation to employee benefit obligations, particularly gratuity and leave encashment. A primary issue is the manner in which an entity should account for the increase in gratuity liability arising from the revised wage definition and expanded employee coverage under the codes. Specifically, entities are required to assess whether the resulting increase in obligation should be treated as a change in actuarial assumptions, giving rise to actuarial gains or losses, or as a plan amendment that results in past service cost under the applicable accounting framework.

Further complexity arises from the timing of recognition of the additional liability. Although the codes are effective from 21st November 2025, the supporting Rules are yet to be notified. Based on legal evaluation, the revised wage definition is considered to be immediately applicable, requiring gratuity to be paid in accordance with the New Labour Codes to employees whose last working day falls on or after 21st November 2025. In this context, listed entities with a 31st March financial year-end need to evaluate whether the additional gratuity obligation should be recognised in the interim financial results for the period ending 31 December 2025 or whether recognition can be deferred until the financial year ending 31 March 2026.

In addition, questions arise regarding the presentation of the incremental expense resulting from the increase in gratuity and/or leave encashment obligations. Entities need to evaluate whether such additional expense can be presented as an exceptional item in the Statement of Profit and Loss or whether it should be included within employee benefit expenses in accordance with the relevant accounting standards.

Furthermore, the increase in gratuity and leave encashment obligations under the New Labour Codes has tax implications that require careful assessment. Entities must evaluate the impact on current tax outflows as well as the recognition and measurement of deferred tax assets or liabilities arising from the timing differences associated with the revised employee benefit obligations