The Institute of Chartered Accountants of India (ICAI) has issued a mandate: companies must account for increased gratuity and leave costs from new labour codes in their December 2025 quarter results. Learn what this means for your salary structure and financial reporting.
New Labour Codes Are Here: What Every Company Must Do In December Quarter
Get ready for a big shift in how your company handles employee benefits. New labour codes that kicked in last month aren't just HR policies - they're about to hit your company's financial statements directly, starting with the upcoming December quarter results.
The Institute of Chartered Accountants of India (ICAI) has just issued a crucial alert: all companies, including listed entities, must account for the increased costs linked to employee gratuity and leave in their third-quarter (Q3) FY26 financial reports.
The Clock is Ticking on Accounting Changes
While the new labour codes officially took effect on November 21, 2025, their supporting rules are still in the pipeline. However, one major piece is already active: the new definition of "wages." This change alone forces companies to make accounting adjustments beginning this quarter.
"The increase in gratuity liability arising from new labour codes needs to be recognised in interim financial statements for the period ending December 31, 2025," states the ICAI note, pointing to established accounting standards (Ind AS 19 and AS 15).
Why Your Salary Structure is Now a Financial Priority
The heart of the change lies in how you pay your team. The new codes mandate that at least 50% of an employee's total remuneration must be made up of basic pay, dearness allowance, and retaining allowance - a bundle now formally defined as "wages."
This shift is critical because gratuity payments, governed by the newly subsumed Payment of Gratuity Act, must now be calculated based on these "last drawn wages." A higher wage base means a significantly higher gratuity liability for companies.
Good News for Employees, a New Cost for Companies
Employees have something to cheer about. The work requirement to earn paid annual leave has been slashed from 240 days to just 180 days, allowing staff to access time off much sooner.
For companies, the ICAI clarifies this too has an immediate financial impact: any increase in leave obligation must be recognised as an expense in the profit and loss statement right away.
Navigating the Financial Impact
The key takeaway for finance teams is clear: higher gratuity costs are coming, and they must be reflected as an expense on the books.
However, there's an important nuance. If a company restructures salaries to meet the new "wages" rule without actually increasing an employee's total take-home pay, the resulting rise in gratuity and leave costs is treated differently. In this specific case, the increase would be classified as a "past service cost." This is a technical term for the financial impact of changes to retirement benefit plans for work employees have already done in prior years.
In short: Companies can't delay. The financial implications of these labour reforms are no longer future planning; they are present-tense accounting that must be addressed before closing the books for December.
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