What the new labour codes mean for your salary, gratuity: ICAI breaks it down
At the core of the changes is a redefinition of wages. Under the new Labour Codes, at least 50% of an employee’s total remuneration must be paid as wages, which include basic pay, dearness allowance and retaining allowance.
- Dec 31, 2025,
- Updated Dec 31, 2025 5:11 PM IST
As India moves closer to implementing the four new Labour Codes, gratuity has emerged as the benefit drawing the sharpest focus among employees. While debates around working hours, compliance costs and wage structures have dominated policy discussions, there is still considerable confusion at the employee level about how gratuity eligibility, calculation and payouts will change once the new framework comes into force.
Seeking to address this uncertainty, the Institute of Chartered Accountants of India (ICAI) has issued a comprehensive set of frequently asked questions (FAQs) on the accounting and implementation aspects of the Labour Codes. Though technical in presentation, these clarifications offer several takeaways that directly affect employees, particularly on higher gratuity payouts, expanded eligibility and the timing of benefit recognition.
New codes, new salary structure
At the core of the changes is a redefinition of wages. Under the new Labour Codes, at least 50% of an employee’s total remuneration must be paid as wages, which include basic pay, dearness allowance and retaining allowance. ICAI clarifies that if wages fall below this level, they will be deemed to be 50% of total pay by default.
This shift is critical because gratuity is calculated on the basis of last drawn wages. With the Payment of Gratuity Act, 1972, now subsumed into the new Labour Codes, gratuity calculations must align with the revised wage definition. ICAI explicitly states that gratuity must be computed on wages that meet the minimum 50% threshold. For employees, especially those with salary structures heavy on allowances, this translates into a higher wage base and, in turn, larger gratuity accruals.
Fixed-term employees
One of the most significant clarifications relates to fixed-term employees. Earlier, gratuity was payable only after completing five years of continuous service, effectively excluding many contractual workers. ICAI confirms that under the new Labour Codes, fixed-term employees—including those on contract—will become eligible for gratuity after completing just one year of service. This marks a major shift for a workforce segment that has grown rapidly in recent years, bringing gratuity within reach far earlier than before.
The FAQs also address concerns around timing. Although the Labour Codes came into effect on November 21, 2025, several implementation rules are still pending. ICAI clarifies that this does not allow companies to defer gratuity changes. For employees exiting service on or after the effective date, gratuity must be paid as per the new norms. Moreover, the resulting increase in gratuity liability must be recognised in financial statements for the period ending December 31, 2025, leaving little room for delay.
Salary restructuring
Another area of interest is salary restructuring. Many employers are expected to redesign pay packages to comply with the 50% wage rule. ICAI draws a clear distinction between restructuring and actual pay hikes. If a company merely restructures salary components without increasing total pay, the rise in gratuity liability is treated as past service cost. However, genuine salary increases are accounted for separately. For employees, this means restructuring alone can improve gratuity calculations, but real pay growth still has a stronger long-term impact.
ICAI has also clarified that companies are not required to revise past financial statements due to the new Labour Codes. The enactment is considered a non-adjusting event for periods prior to November 21, 2025, though disclosures of impact are required.
Beyond gratuity, ICAI confirms that leave encashment obligations will also rise due to the expanded wage definition. Any increase in leave-related liabilities must be recognised immediately as an expense, further strengthening employee benefit protections.
As India moves closer to implementing the four new Labour Codes, gratuity has emerged as the benefit drawing the sharpest focus among employees. While debates around working hours, compliance costs and wage structures have dominated policy discussions, there is still considerable confusion at the employee level about how gratuity eligibility, calculation and payouts will change once the new framework comes into force.
Seeking to address this uncertainty, the Institute of Chartered Accountants of India (ICAI) has issued a comprehensive set of frequently asked questions (FAQs) on the accounting and implementation aspects of the Labour Codes. Though technical in presentation, these clarifications offer several takeaways that directly affect employees, particularly on higher gratuity payouts, expanded eligibility and the timing of benefit recognition.
New codes, new salary structure
At the core of the changes is a redefinition of wages. Under the new Labour Codes, at least 50% of an employee’s total remuneration must be paid as wages, which include basic pay, dearness allowance and retaining allowance. ICAI clarifies that if wages fall below this level, they will be deemed to be 50% of total pay by default.
This shift is critical because gratuity is calculated on the basis of last drawn wages. With the Payment of Gratuity Act, 1972, now subsumed into the new Labour Codes, gratuity calculations must align with the revised wage definition. ICAI explicitly states that gratuity must be computed on wages that meet the minimum 50% threshold. For employees, especially those with salary structures heavy on allowances, this translates into a higher wage base and, in turn, larger gratuity accruals.
Fixed-term employees
One of the most significant clarifications relates to fixed-term employees. Earlier, gratuity was payable only after completing five years of continuous service, effectively excluding many contractual workers. ICAI confirms that under the new Labour Codes, fixed-term employees—including those on contract—will become eligible for gratuity after completing just one year of service. This marks a major shift for a workforce segment that has grown rapidly in recent years, bringing gratuity within reach far earlier than before.
The FAQs also address concerns around timing. Although the Labour Codes came into effect on November 21, 2025, several implementation rules are still pending. ICAI clarifies that this does not allow companies to defer gratuity changes. For employees exiting service on or after the effective date, gratuity must be paid as per the new norms. Moreover, the resulting increase in gratuity liability must be recognised in financial statements for the period ending December 31, 2025, leaving little room for delay.
Salary restructuring
Another area of interest is salary restructuring. Many employers are expected to redesign pay packages to comply with the 50% wage rule. ICAI draws a clear distinction between restructuring and actual pay hikes. If a company merely restructures salary components without increasing total pay, the rise in gratuity liability is treated as past service cost. However, genuine salary increases are accounted for separately. For employees, this means restructuring alone can improve gratuity calculations, but real pay growth still has a stronger long-term impact.
ICAI has also clarified that companies are not required to revise past financial statements due to the new Labour Codes. The enactment is considered a non-adjusting event for periods prior to November 21, 2025, though disclosures of impact are required.
Beyond gratuity, ICAI confirms that leave encashment obligations will also rise due to the expanded wage definition. Any increase in leave-related liabilities must be recognised immediately as an expense, further strengthening employee benefit protections.