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Labour Law
3 min. Read
|Jan 16, 2026 10:54 AM

ICAI Issues FAQs as Labour Codes Trigger Statutory Liabilities

Sahiba Sharma
By Sahiba Sharma
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The implementation of India’s four new Labour Codes on November 21, 2025, has triggered a seismic shift in corporate financial reporting.

As companies prepare their results for the quarter ending December 31, 2025, they face a “compliance shock” driven by a new, standardized definition of “wages” and expanded social security mandates.

The 50% Wage Rule Under Labour Codes: A Financial Watershed

The most critical accounting challenge lies in the Code on Wages (2019), which mandates that “wages” (Basic Pay, DA, and Retaining Allowance) must constitute at least 50% of an employee’s total remuneration.

For many firms where allowances previously made up the bulk of CTC, this reclassification significantly widens the base for calculating gratuity, provident fund, and leave encashment.

Under Ind AS 19 and AS 15, companies treat this as a Plan Amendment, which requires them to recognize “Past Service Costs.”

For listed entities following Ind AS 19, the entire increased liability must be expensed immediately in the P&L statement, leading to the massive one-time hits recently reported by IT giants like TCS and Infosys.

Expanded Gratuity for Fixed-Term Employees

The Code on Social Security (2020) has further intensified liabilities by slashing the gratuity eligibility threshold for Fixed-Term Employees (FTEs) from five years to just one year.

This expansion forces companies to provide for a significantly larger portion of their contractual workforce, impacting sectors heavily reliant on flexible staffing.

India’s New Labour Codes: Audit Implications and Professional Scepticism

The transition has placed auditors under intense pressure.

According to recent ICAI FAQs, auditors must now exercise enhanced professional scepticism under several standards:

  • SA 540: Auditors must scrutinize the management’s bifurcation of costs between “plan amendments” (structural changes) and “actuarial assumptions” (salary hikes).
  • SA 570: Mandatory funding of gratuity through insurance (likely with LIC or approved insurers) could strain working capital, requiring a review of the “Going Concern” status for cash-strapped MSMEs.
  • SA 701: For listed companies, these labor code impacts are expected to be reported as Key Audit Matters (KAM) due to their material and complex nature.

Interim Reporting and Disclosure

The ICAI has clarified that companies cannot defer these costs. Companies must recognize the full impact in their Q3 FY26 interim results.

For periods ending before the November 21 trigger date, the impact is a “non-adjusting event,” yet transparent disclosure of the estimated financial effect remains mandatory.

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