MUMBAI: A significant trend has emerged in the corporate financial landscape for the third quarter of the fiscal year 2026, with numerous companies reporting substantial one-time provisions related to employee benefits. This widespread financial adjustment is directly attributed to the implementation of the new labour code, specifically the Code on Social Security, 2020. The changes introduced by this legislation are reshaping how companies account for future liabilities, particularly concerning gratuity payments, and are having a profound impact on various stakeholders across the economy.
Understanding the Core Changes in the Labour Code
The primary driver behind these corporate provisions is a fundamental redefinition of "wages" for the purpose of calculating gratuity under the Code on Social Security, 2020. This new rule mandates that the wages used to compute gratuity must constitute at least fifty percent of an employee's total cost-to-company (CTC). In scenarios where allowances exceed this fifty percent threshold, the surplus amount must be reintegrated into the wage base for gratuity calculations. Consequently, this adjustment substantially increases the foundational amount upon which gratuity is determined, leading to higher projected future payouts for companies.
Additionally, the code introduces a pivotal change in eligibility criteria for fixed-term employees. Previously, such workers were required to complete five years of service to qualify for gratuity benefits. The revised legislation reduces this requirement to just one year of service, significantly broadening the pool of employees entitled to gratuity. These combined modifications compel organizations to recognize and provision for elevated future gratuity obligations, resulting in the notable one-time charges observed in their financial statements for Q3FY26.
Legislative Timeline and Implementation
The government initiated this transformative shift through the Code on Social Security, 2020, which is part of a broader set of four consolidated labour codes designed to replace twenty-nine older labour laws. While Parliament passed these codes in 2020, the detailed implementation rules were formally notified later. The new labour codes, including the Social Security Code, officially came into effect on November 21, 2025. Although the central framework is now operational, individual states are still in the process of finalizing their specific implementation rules, adding a layer of complexity to compliance.
Motivations Behind the Labour Reform
The reform was driven by multiple objectives aimed at modernizing India's labour landscape. A primary goal was to simplify the existing web of labour laws, thereby enhancing social security coverage and aligning regulations with contemporary employment practices. A critical concern addressed by the new definition of wages was the prevalent corporate practice of structuring salaries with a low basic pay component and high allowances. This strategy was often employed to minimize statutory payouts for benefits like provident fund and gratuity. The revised wage definition curtails this flexibility, promoting greater transparency and equity in compensation structures.
Another significant trigger for the change was the increasing reliance on fixed-term employment across various industries. The government sought to extend essential social security benefits to these workers, particularly in sectors characterized by high attrition rates and extensive contractual hiring, ensuring better protection for a growing segment of the workforce.
Benefits for Employees and Broader Implications
Employees stand to gain considerably from these legislative adjustments. The most direct benefit is the prospect of higher gratuity payouts upon retirement or exit, thanks to the expanded wage base used in calculations. Furthermore, fixed-term employees, who were previously excluded from gratuity benefits unless they completed a lengthy five-year tenure, can now qualify after just one year of service. This change is especially advantageous for workers in industries with short-term or project-based employment models, offering them enhanced financial security.
The reforms also aim to foster greater transparency in salary structures and broaden the overall social security net, contributing to improved worker welfare and stability.
Industry-Specific Impacts and Financial Ramifications
The financial repercussions of the new labour code vary significantly across different sectors, influenced by factors such as salary structures and workforce composition.
- Manufacturing and Heavy Industries: These sectors, which heavily depend on contract and fixed-term workers, are experiencing a substantial increase in gratuity liabilities. This may prompt companies to reevaluate their workforce models and employment strategies.
- Technology and IT Services: Companies in this domain often utilize allowance-heavy salary structures. They are now compelled to potentially restructure compensation packages to comply with the new wage definition norms, impacting their financial planning.
- Banking and Financial Services: The sector is confronting higher statutory benefit costs and increased liabilities, particularly for outsourced and contractual staff, which could affect operational expenses.
- Construction: With a large informal workforce, the construction industry faces heightened compliance requirements and settlement obligations under the new rules.
- Retail and E-commerce: Firms engaged in seasonal hiring and gig-based employment may encounter elevated employee benefit costs and challenges in worker classification.
- Healthcare: The sector's round-the-clock operations and reliance on contract staffing could lead to increased wage and benefit compliance costs, adding to financial pressures.
Sectors Anticipating the Highest Provisions
Manufacturing and heavy industries are projected to record the largest one-time provisions due to the new labour code. These sectors typically maintain extensive contract workforces, employ lower basic salary structures, and have a higher dependence on fixed-term employment, all of which significantly amplify gratuity liabilities. While technology and financial services companies are also expected to see considerable increases in provisions, primarily due to adjustments in salary structure norms, their overall impact is generally anticipated to be less pronounced compared to the manufacturing sector.
As companies navigate these regulatory changes, the financial implications are becoming increasingly evident in their quarterly results, marking a pivotal shift in how employee benefits are accounted for in corporate India.
