New labour codes: ICAI clarifies gratuity, leave accounting rules

Companies must recognise higher gratuity and leave liabilities under new labour codes as expenses in interim financial results for the period ending December 31, 2025

Companies would have to recognise the increase in gratuity liability arising from new labour codes in their interim financial statements and results for the period ending December 31, the Institute of Chartered Accountants of India (ICAI) has said in its FAQs on the new labour codes. The institute said that any change in leave obligation arising from the New Labour Codes should also be stated as an expense in the Statement of Profit and Loss immediately.

 

Earlier, gratuity was payable to an employee only if the person had completed five years of continuous service. Under the new Labour Codes, fixed-term employees, which include contract employees, will be entitled to gratuity on completing one year of service.

   

“Under AS 15/ Ind AS 19, the changes to gratuity benefit resulting from the New Labour Codes are plan amendments and they are required to be treated as past service costs,” ICAI has clarified.

 

“These FAQs certainly bring in clarity in terms of accounting treatment-related aspects for various provisions linked to gratuity and leave obligations. But the larger uncertainty regarding the effective period of calculation of gratuity, inclusions of terms like ESOP (Employee Stock Ownership Plan), variable pay, etc are still left unanswered,” Anshul Jain, National Leader, Regulatory, PwC India.

 

On November 21, the government announced the implementation of the four Labour Codes -- the Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020 and the Occupational Safety, Health and Working Conditions Code, 2020.

 

The new codes aim to modernise labour regulations, enhance workers’ welfare and align the labour ecosystem with the evolving world of work, including gig work.

 

ICAI stated that the increase in gratuity liability due to application of the new labour codes is a past service cost as this results in changes to the benefits payable under the plan. This has to be immediately recognised as an expense in the Statement of Profit and Loss as per accounting standards Ind AS, Ind AS 19.

 

The Institute further clarified, “For employees who are yet to complete the applicable service period, past service cost is amortised over the vesting period and recognised as an expense in the Statement of Profit and Loss.”