ICAI clarifies on gratuity, interim reporting, leave obligations, and tax impact

Labour, HR & Safeguarding
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A useful reference for anyone dealing with gratuity accounting after the new wage definition / eligibility changes. Thank you @sureshponnappa for sharing.

The Institute of Chartered Accountants of India (ICAI) has recently issued a detailed set of FAQs clarifying the accounting implications of the New Labour Codes , particularly in relation to gratuity, leave obligations, interim reporting, exceptional items and tax impact.

Given the significance of these changes and the potential impact on employee benefit liabilities and reported profits, sharing the ICAI document along with a summary of the key questions and ICAI’s clarification for your quick reference.

Refer to the attachment.

Issue / Question ICAI’s Clarification
Increase in gratuity liability due to new wage definition and eligibility changes - Treated as a plan amendment and accounted as past service cost under Ind AS 19 / AS 15.
- Past service cost is recognized immediately under Ind AS 19, whilst under AS 15, the vested portion is recognized immediately and the unvested portion is amortized over the remaining vesting period.
Salary restructuring vs actuarial assumption change Split into two parts:
(a) Structural changes due to code implementation are plan amendment and treated as past service cost.
(b) real salary increases vis-à-vis assumed represents actuarial gains / loss.
Interim financial reporting (Dec 2025 results) Impact needs to be recognized in interim results for periods ending after 21 November 2025. Thus, impact to be recognized in Dec 2025 quarter.
Treatment for periods ending before 21 November 2025 Classified as a non-adjusting event, but disclosure is required.
Impact on leave obligations Treated as past service cost and recognized immediately (no amortization permitted).
Presentation as an exceptional item Based on judgement and materiality; disclosure required in all cases.
Tax impact (current and deferred tax) Current tax based on deductibility rules; deferred tax asset may arise for future deductible amounts.

Q&A by the ICAI

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Thanks for sharing this! Is there an impact on gratuity liability when organizations hire external consultants for a fixed term, say for 1 or 2 years?

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Please note consultants are not employees and gratuity coverage is not available for them, also consultant arrangements should typically be for short specific assignments only based on professional skill required which the consultant possesses. The intent of Govt under the new labor codes is to encourage flexi hiring if engagement is for longer period say 2 years for tasks typically performed under an employer employee framework as fixed term employee (FTE) who will be eligible for gratuity coverage.

CS Sharad Bhargava

1 Like
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Thank you Sharad! This is helpful