[2025] 171 taxmann.com 681 (Article)
Introduction
The enactment of the New Labour Codes marks a significant shift in India’s employment and compensation framework, with far-reaching implications for employee benefit accounting. One of the most consequential changes relates to the redefinition of “wages” and its direct impact on gratuity and other defined benefit obligations accounted for under AS 15 and Ind AS 19. For professional accountants, this change raises important questions around recognition, timing, presentation, and disclosure of increased liabilities.
1. Key definitions and terminology under Ind AS 19
To understand the accounting implications arising from the enactment of the New Labour Codes, it is important to first become familiar with the key terms and definitions used in Ind AS 19. The relevant concepts are explained below.
1.1. Post-employee benefit plan
Post employee benefit plan are the formal or informal arrangements under which an entity provides post-employment benefits for one or more employee. Thus, under these plans, the benefits are given to the employees after employment. Further, the post-employment benefit plans are broadly classified as “Defined Contribution Plans” and “Defined Benefit Plans”.
1.2. Defined Contribution Plans
Defined contribution plans are post-employment benefit plans under which an entity pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods.
Example: Contribution in the nature of “Provident Fund” made by the employer to the Employee Provident Fund Organisation (EPFO).
1.3. Defined Benefit Plans
Defined benefit plans are the post-employment benefit plans other than defined contribution plans. Thus, under a defined benefit plan, the employer’s obligation is to provide the agreed level of benefits to employees, after considering the actuarial and investment risks.
Example: Payment of “Gratuity” by the employer to the employee.
1.4. Actuarial gain or loss under defined benefit plan
Actuarial gains and losses are changes in the present value of the defined benefit obligation resulting from:
(a) experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred) and
(b) the effects of changes in actuarial assumptions.
1.5. Past service cost under defined benefit plan
Past service cost is the change in the present value of the defined benefit obligation for employee service in prior periods, resulting from a plan amendment (the introduction or withdrawal of, or changes to, a defined benefit plan) or a curtailment (a significant reduction by the entity in the number of employees covered by a plan).
2. Understanding the Impact of the New Labour Code on Accounting of defined benefit plans
The “New Labour Codes” introduce significant changes to the determination of wages and the computation of gratuity. Under the revised framework, a minimum of 50% of an employee’s total remuneration is required to comprise “Basic Pay”, “Dearness Allowance” and “Retaining Allowance”, collectively defined as “wages.” Where these components constitute less than 50% of total remuneration, the law mandates a deemed adjustment, such that wages are considered to be 50% of total remuneration for statutory purposes.
Further, with the subsuming of the Payment of Gratuity Act, 1972, into the New Labour Codes, gratuity is now required to be calculated based on the last drawn wages, which, as noted above, must be at least 50% of total remuneration. This change has a direct bearing on the quantum of gratuity liability for employers.
In addition to changes in computation, the Codes also expand the eligibility criteria for gratuity. While the requirement of five years of continuous service continues to apply to permanent employees, fixed-term employees, including contract workers, are now entitled to gratuity upon completion of one year of service.
2.1. Impact of New Labour Code on accounting for gratuity
As explained earlier, the revised definition of “wages” under the New Labour Codes, along with the extension of gratuity eligibility to fixed-term employees (including contract workers) after completion of one year of service, is expected to increase gratuity and other long-term employee benefit liabilities for employers.
From an accounting perspective, recognising this increased liability is critical, particularly because the new definition of wages applies immediately. Accordingly, any employee whose last working day is on or after 21st November 2025 is required to be paid gratuity in line with the New Labour Codes. This creates several practical questions for preparers of financial statements, especially for listed entities with a 31st March financial year-end that publish quarterly financial results. Key questions include:
(a) Accounting of increased liability
How shall the company recognise the increased gratuity liability arising from the implementation of the New Labour Codes?
(b) Timing of recognition
Whether the additional gratuity obligation arising from application of the New Labour Codes should be recognised in the financial results for the quarter ended 31st December 2025, or whether the impact can be deferred to the financial year ending 31st March 2026?
(c) Assessment of subsequent events
Whether the increase in gratuity liability should be considered an adjusting event or a non-adjusting event for the purpose of preparing financial statements?
(d) Presentation in the Statement of Profit and Loss
Whether the additional expense arising from the increase in gratuity obligations can be presented as an exceptional item in the Statement of Profit and Loss?
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