The four Labour Codes — Code on Wages, Industrial Relations Code, Code on Social Security, and the Occupational Safety Health and Working Conditions Code — became effective across India on 21 November 2025. For companies preparing actuarial valuations under Ind AS 19 or AS 15, the most consequential change is the redefinition of "wages" under the Code on Wages.
What Changed — The Old vs. New Wage Definition
Under the legacy Payment of Gratuity Act, 1972, gratuity was computed on "wages" defined narrowly as basic salary plus dearness allowance. Many companies over the years structured compensation to keep basic salary low — often 20–35% of CTC — effectively minimising gratuity and leave encashment exposure.
Under the Code on Wages, "wages" is broadly defined to include all remuneration, subject to a list of specific exclusions (HRA, bonus, PF contributions, gratuity, overtime, etc.). However, these exclusions are subject to a critical constraint:
Impact on Actuarial Valuations
For companies where basic salary is currently below 50% of CTC, the effective wage base for gratuity and leave encashment increases under the new definition. This flows through the Ind AS 19 valuation in three ways:
- Defined Benefit Obligation (DBO) increases — the projected gratuity payable at retirement is higher in absolute terms
- Current Service Cost increases — each year of service accrues a larger unit of benefit under the higher wage base
- Past Service Cost arises — a one-time P&L charge recognising the increase in benefits attributable to prior service, to be recognised immediately under Ind AS 19 Para 103
Illustrative Example
Consider an employee with monthly remunaration of ₹1,00,000 and basic salary of ₹25,000. Under the old definition, gratuity is computed on ₹25,000. Under the new definition, wages can be any amount more than ₹50,000 (50% of remunaration). Gratuity accrual may effectively more than doubles for this employee — a material increase for companies with widespread low-basic structures.
Impact on Leave Encashment Valuations
Leave encashment is also computed on the daily wage rate at the time of encashment. The higher wage base under the Code on Wages increases the per-day rate, and therefore the total leave liability. For companies with significant accumulated leave balances — common in IT, banking, and manufacturing — this is material.
Accounting Treatment Under Ind AS 19
| Item | Treatment | P&L or OCI? |
|---|---|---|
| Past service cost — change in benefit terms | Recognised immediately | P&L (cannot be deferred) |
| Revised current service cost (ongoing) | Recognised each year | P&L |
| Remeasurements (actuarial gains/losses) | Recognised immediately | OCI (not recycled) |
What Should Your Company Do?
- Quantify the revised wage base for each affected employee before commissioning the valuation
- Engage your actuary early — before audit fieldwork begins — so the past service cost can be quantified and the finance team can plan for the P&L impact
- Brief your auditor on the accounting treatment — they will expect the past service cost to be disclosed separately in the notes
- Review gratuity trust funding levels — if you have a funded scheme, the liability increase may create a deficit requiring additional contributions
Frequently Asked Questions
Does this apply to all companies?
Yes — the Code on Wages applies to all establishments across India regardless of size, industry, or location. Both central and state government establishments are covered. The key practical impact is on private sector companies that have historically maintained low basic salary structures.
What if our basic salary is already at 50% of gross remuneration?
This is a common assumption but requires careful verification. The new wage definition under the Code on Wages is not a basic salary threshold — it is a remuneration-minus-exclusions model. Total remuneration minus specified exclusions (HRA, PF, gratuity, overtime, bonus, conveyance, and certain other allowances) must not fall below 50% of total remuneration. If the exclusions in your payroll structure exceed 50% of gross, the excess is reclassified as wages — regardless of what your basic salary is.
The distinction matters because many payroll structures include allowances that do not appear in the exclusion list under the Code — special allowances, performance pay structured as fixed components, or reimbursements that are effectively salary and paid without evidence of actual expense. These are not excludable and therefore count toward the wage base. A company where basic is 50% of gross but whose remaining 50% includes both excludable and non-excludable components may find its effective wage base is higher than 50%. The only reliable test is to map each payroll component against the exclusion list in Section 2(y) of the Code on Wages and verify the arithmetic.