As India prepares for the rollout of the four new Labour Codes, one benefit has drawn maximum attention from employees across sectors — gratuity. While discussions around wages, work hours and compliance have been ongoing, many employees are still unclear about how gratuity calculations, eligibility and payouts may change once the codes are implemented.
To address accounting and implementation-related doubts, the Institute of Chartered Accountants of India (ICAI) has released a detailed set of FAQs on the new Labour Codes.
While these clarifications are technical in nature, they throw up several important takeaways that matter directly to employees — especially on how gratuity liabilities will rise, when they must be recognised, and who becomes eligible.
Here’s what ICAI’s responses reveal, explained from an employee’s lens.
Why gratuity payouts are likely to rise under the new labour codes
The starting point of ICAI’s clarification is a fundamental shift introduced by the new labour codes — how wages are defined.
ICAI notes that under the new framework, at least 50% of total remuneration must be paid as wages, which includes basic pay, dearness allowance and retaining allowance. If wages fall below this threshold, they are “presumed to be 50% of total remuneration”.
This matters because gratuity is calculated on last drawn wages. ICAI clearly states that the new labour codes have subsumed the Payment of Gratuity Act, 1972, and gratuity must now be calculated on wages that meet the new definition.
As ICAI explains: “The new Labour Codes… require gratuity payment to all employees to be calculated based on last drawn wages which should be minimum 50% of total remuneration.”
For employees, this means a higher wage base automatically leads to higher gratuity accruals, especially for those whose salary structures were previously skewed towards allowances.
Big eligibility shift: fixed-term employees gain gratuity after one year
One of the most employee-friendly clarifications in the ICAI FAQs relates to fixed-term employment.
Earlier, gratuity was payable only after completing five years of continuous service. ICAI clarifies that while this condition continues for permanent employees, the rules change significantly for fixed-term staff.
ICAI states: “Under the new Labour Codes, fixed term employees (which include contracted employees) will be entitled to gratuity on completing one year of service.”
This is a major change for contractual and fixed-term employees, who form a growing part of India’s workforce. For them, gratuity is no longer a distant benefit tied to long service, but a real entitlement after one year.
When does the increased gratuity liability kick in?
Another common concern is timing. The new labour codes are effective from 21 November 2025, but supporting rules are yet to be notified. Does this mean gratuity changes can be postponed?
ICAI’s answer is clear. For employees who exit service on or after 21 November 2025, gratuity must be paid as per the new requirements. ICAI clarifies that the resulting increase in gratuity liability must be recognised in financial results for the period ending 31 December 2025, and cannot be deferred to the next financial year.
ICAI explains: “The increase in gratuity liability arising from new labour codes need to be recognised in interim financial statements/results for the period ended 31st December, 2025.”
For employees, this means the revised gratuity rules apply from the effective date, irrespective of when companies internally adjust their systems.
Salary restructuring vs actual pay hike: what really boosts gratuity?
Many employers are expected to restructure salaries to comply with the 50% wage rule. ICAI makes an important distinction here that affects employees’ expectations.
If the salary increase is purely due to restructuring, with no real hike in total pay, the resulting increase in gratuity liability is treated as past service cost. However, if there is a genuine increase in salary, that component is treated separately.
ICAI states: “In a scenario, where entities choose to restructure salary to align with new labour codes and there is no real increase in the salary then the entire increase in gratuity and leave obligation shall be attributed to past service cost.”
For employees, this means restructuring alone improves gratuity calculation, but actual pay hikes still matter more for long-term benefits.
Will companies adjust past financial statements?
Another question addressed by ICAI is whether the gratuity changes require revision of past financial results.
The answer is no.
ICAI clarifies that enactment of the new labour codes is a non-adjusting event for periods before 21 November 2025. Companies must disclose the impact, but past numbers will not be altered.
“Enactment of the New Labour Codes is a non-adjusting event in the financial statements/results for periods ending prior to 21st November, 2025.”
This provides certainty to both employers and employees on how transitions will be handled.
Leave encashment and other benefits also impacted
While gratuity remains the biggest focus, ICAI also confirms that leave encashment obligations will increase due to the revised wage definition.
Importantly, ICAI clarifies that any increase in leave obligation arising from the new labour codes must be recognised immediately as an expense, without amortisation.
“Any change in leave obligation arising from the New Labour Codes is recognised as an expense in the Statement of Profit and Loss immediately.”
This strengthens the financial backing of employee benefits under the new regime.
What employees should take away from ICAI’s clarifications
Put together, ICAI’s FAQs quietly confirm what many employees have been hoping for:
-Gratuity calculations will rise due to higher wage base
-Fixed-term employees gain faster eligibility
-Employers cannot delay recognition of increased gratuity
-Benefits become more transparent and structured
As labour codes move closer to on-ground implementation, ICAI’s clarifications offer a rare window into how employee benefits will actually change — not just in law, but in real payouts.