India’s new labour codes are no longer a future discussion—they are already influencing payroll, accounting, and compliance decisions.
India’s new labour codes are no longer a future discussion—they are already influencing payroll, accounting, and compliance decisions. With the Institute of Chartered Accountants of India (ICAI) clearly stating that gratuity and leave liabilities must be accounted for in Q3 FY26, SMEs can no longer afford a wait-and-watch approach.
At Mintskill HR Advisory, we are seeing a sharp increase in queries from business owners, Finance Managers, and HR heads asking one simple question:
“What exactly do we need to change—and by when?”
This article breaks down the implications in simple language and explains how SMEs can respond confidently, compliantly, and cost-effectively.
What Changed Under the New Labour Codes?
While the supporting rules are still being notified, one critical element is already in force:
1. New Definition of Wages
Under the labour codes:
- At least 50% of total remuneration must qualify as ‘wages’
- Wages include:
- Basic Pay
- Dearness Allowance (DA)
- Retaining Allowance
This single change impacts gratuity, leave encashment, social security contributions, and overall CTC design.
ICAI’s Clear Direction: Act in Q3 FY26
ICAI has advised that:
- Any increase in gratuity liability due to the new wage definition must be recognised in financial results for the quarter ending 31 December 2025
- Accounting must follow:
- Ind AS 19 (for Ind AS companies)
- AS 15 (for others)
This means:
- No deferral to year-end
- No assumption that “rules are not notified yet”
From an audit and governance standpoint, the liability is already live.
Gratuity Impact: The Biggest Cost Surprise
What’s Different Now?
- Gratuity is calculated on last drawn wages
- Since wages must be at least 50% of total pay, gratuity liability automatically increases for most organisations
Two Common SME Scenarios
- Gratuity and leave impact is treated as past service cost
- One-time accounting impact still required
Either way, accounting recognition is unavoidable.
Leave Liability: Another Silent Expense
The labour codes also:
- Reduce eligibility threshold for earned leave from 240 days to 180 days
ICAI has clarified:
Any increase in leave obligation must be recognised immediately as an expense in the Profit & Loss statement.
Many SMEs miss this because leave provisions are often loosely tracked.
Why Payroll Restructuring Needs Caution (Not Aggression)
A common temptation is to quickly reclassify salary components to meet the 50% wage rule.
However, experts warn:
- Aggressive or artificial restructuring can attract scrutiny
- Especially where the structure lacks commercial substance
For Indian companies with:
- Group entities
- Seconded employees
- Overseas parent or subsidiary structures
This also opens up transfer pricing and GAAR (General Anti-Avoidance Rules) considerations.
GAAR & Transfer Pricing: Not Just for MNCs Anymore
Tax authorities may examine:
- Whether salary restructuring is genuinely for statutory compliance
- Or primarily to obtain tax benefits
Key risk areas:
- Cost recharge mechanisms
- Intra-group service pricing
- Secondment arrangements
The message from experts is clear: Compliance-driven restructuring is acceptable. Tax-driven restructuring without documentation is risky.
Documentation Is Your Best Defence
Companies should be ready with:
- Board or management approvals
- Policy notes mapping old salary to new structure
- Payroll workings showing 50% wage compliance
- Actuarial gratuity calculations
- Leave liability computations
- Notes explaining statutory changes
This is not paperwork for paperwork’s sake—it is protection.
How Mintskill HR Advisory Helps SMEs
At Mintskill HR Advisory, we act as a bridge between HR, finance, compliance, and business leadership.
Our services include:
✔ Salary Structure Redesign
- Align with labour codes
- Control cost escalation
- Maintain employee take-home balance
✔ Gratuity & Leave Liability Assessment
- Actuarial coordination
- Q3 FY26 accounting readiness
✔ Payroll & Compliance Audit
- Identify exposure before auditors do
- Correct historical gaps
✔ Documentation & Advisory Support
- Commercial rationale drafting
- Audit-ready explanations
- Support for statutory and tax reviews
We do not offer templates—we offer defensible, business-aligned solutions.
Poll for SME Leaders
What worries you most about the new labour codes?
🔘 Increased gratuity cost
🔘 Salary restructuring complexity
🔘 Audit and compliance risk
🔘 Employee communication
🔘 Not sure where to start
- A cost management issue
- An accounting issue
- A governance issue
SMEs that act early will control the impact. Those who delay will explain it—to auditors, regulators, and boards.
If you want clarity, control, and compliance—Mintskill HR Advisory is ready to help.
Need a quick impact assessment or salary structure review? Reach out to Mintskill HR Advisory for a practical, SME-focused consultation. Request a Labour Code Impact Assessment (30-minute advisory call)