Gratuity Liabilities Surge Under New Labour Codes

Corporate India is witnessing a significant impact on its bottom line this earnings season as the implementation of the new Labour Codes, effective November 21, 2025, forces a massive recalculation of employee benefits.

Major players, particularly in the IT services sector, have reported a sharp rise in gratuity provisions in their October–December (Q3) financial results, reflecting a structural shift in how wages are defined.

Labour Codes: The “50% Wage Rule” in Impact

The primary driver behind the surging liabilities is the new, uniform definition of “wages.”

Under the Code on Social Security, 2020, an employee’s basic salary plus dearness allowance must now constitute at least 50% of their total remuneration.

Previously, many firms maintained a low basic pay—often 30% to 40% of the Cost-to-Company (CTC)—while loading the remainder into various allowances.

Since gratuity is calculated based on the “wage” component, this mandatory upward adjustment has led to a corresponding spike in the gratuity pool that companies must maintain for their workforces.

Heavy Hitters Lead the Provisioning

The financial scale of this transition was most evident in the results of India’s IT giants.

Tata Consultancy Services (TCS) reported a one-time statutory charge of ₹2,128 crore in Q3, with ₹1,816 crore specifically attributed to incremental gratuity costs.

Similarly, HCL Technologies recorded a one-off hit of approximately ₹956 crore.

These exceptional items significantly weighed down quarterly net profits, with TCS seeing a 14% year-on-year decline despite underlying revenue growth.

Labour Codes Expanded Eligibility for Fixed-Term Staff

Beyond the wage definition, the new codes have lowered the eligibility threshold for gratuity.

While permanent employees still generally require five years of service, “fixed-term” employees are now eligible for pro-rata gratuity after completing just one year of continuous service.

This expansion of the beneficiary pool is forcing companies with large contract or project-based workforces to recognize additional liabilities that did not exist under the previous 1972 Act.

Accounting Standards and Future Margins

In accordance with Ind AS 19 and ICAI guidelines, companies must recognize these “past service costs” immediately in their Statement of Profit and Loss.

While companies treat the initial surge as a one-time exceptional item, analysts warn that a recurring structural increase will drive up employee costs.

Leading firms expect a sustained 10 to 20 basis point drag on operating margins in future quarters as the higher contribution levels for provident funds and leave encashment also become permanent fixtures of the Indian corporate landscape.

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