India's New Labour Codes Are Live. Your Auditors Are Already Looking.
Four new Labour Codes have replaced 29 existing laws — with no transition period. ICAI has formally guided auditors on what to examine in your financial statements. Here's what your Finance, HR, and Compliance teams need to know.
India Just Rewrote the Rules on Labour Law
On 21 November 2025, India's four New Labour Codes came into force — consolidating and replacing 29 existing labour laws, which now stand repealed, subject to limited savings provisions.
The four Codes are: the Code on Wages, the Code on Social Security, the Industrial Relations Code, and the Occupational Safety, Health and Working Conditions Code.
No formal transition period was provided. Detailed Rules are still being notified by Central and State Governments — but that doesn't pause your obligations. Existing rules continue to apply only to the extent they are not inconsistent with the Codes. The compliance clock started on the effective date.
"Management cannot defer assessment or accounting impact merely because rules are pending."
— ICAI Guidance Note on New Labour Codes
This Isn't Just an HR Matter. It's in Your Audit Scope Now.
The Institute of Chartered Accountants of India (ICAI) has issued a formal Guidance Note on the New Labour Codes — addressed specifically to auditors. It tells them exactly what to look for in your financial statements, and when the Codes can affect their audit opinion.
ICAI has classified Labour Code compliance under SA 250 — the auditing standard covering laws and regulations that directly affect the amounts and disclosures in financial statements.
That's a significant classification. It places the Labour Codes alongside accounting standards — not in the background with routine HR filings.
Being compliant isn't enough. ICAI is explicit: management's interpretation, implementation, and documentation of Labour Code requirements are audit-critical. You need to demonstrate that you assessed, decided, and documented.
What Happens If Your Organisation Isn't Ready
The ICAI Guidance makes clear that inadequate response to the Labour Codes may lead to:
Material Misstatement Risk
Employee expenses, statutory dues, and benefit liabilities may be misstated — because the numbers no longer reflect the correct legal position.
CARO Deficiencies
Control deficiencies in payroll and statutory compliance systems may surface in your CARO report and internal financial controls review.
Emphasis of Matter
Where Labour Code disclosures are significant, auditors may include an Emphasis of Matter paragraph in their report.
Modified Audit Opinion
In cases of material non-compliance or lack of evidence, auditors may modify their opinion.
Governance Gaps
Auditors are required to review Board and Audit Committee minutes to assess the extent of governance oversight over Labour Code implementation. What those minutes show — or don't show — is part of the audit.
Three Things That Changed — and Why Each One Affects Your Bottom Line
The Definition of "Wages" Has Changed
This is the change with the broadest ripple effect. Under the New Labour Codes, wages include core components such as basic pay, dearness allowance, and retaining allowance. Certain components may be excluded — but only up to a point.
If excluded components exceed 50% of total remuneration, the excess is automatically deemed to be wages. Remuneration in kind, up to a specified limit, also forms part of wages.
That 50% cap has direct consequences. Every one of these calculations is now affected:
- Provident Fund contributions
- ESI contributions
- Gratuity
- Leave encashment
- Retrenchment compensation
- Notice pay
If your salary structures were designed with a lower basic and higher allowances, those structures need to be tested. Where the cap is breached, the excess flows back into wages — and changes every statutory computation above. Your payroll system may be calculating on a wage figure that no longer holds.
ICAI's Guidance is explicit: management decisions around salary structures have direct accounting and audit implications, and auditors are required to examine these closely.
More of Your People Are Now Inside the Compliance Perimeter
The definition of "employee" under the New Labour Codes is broader than before. This changes the population of people for whom you must calculate statutory dues, benefits, and actuarial valuations.
Three categories are newly covered or expressly recognised:
Managerial, supervisory, and administrative personnel
Previously often outside the scope of certain labour law provisions, now included.
Fixed-term employees
Expressly recognised under the Codes, with changes in eligibility that affect benefit provisioning for this category.
Certain gig and platform workers
Brought within the social security framework for the first time.
If your organisation uses contract workers, fixed-term hires, or platform-based arrangements, review your current classifications now.
Your Gratuity and Leave Liabilities Have a New Accounting Treatment
Accounting positions in this section are drawn from the ICAI Guidance and ASB FAQs. Please consult your auditors and advisors for treatment specific to your organisation.
Any increase in gratuity or leave encashment liability arising from the Labour Codes is treated as a plan amendment under AS 15 / Ind AS 19 — giving rise to past service cost.
Under Ind AS, that past service cost is recognised immediately in the Statement of Profit and Loss. Under Indian GAAP (AS 15), vested past service cost is recognised immediately; unvested past service cost is amortised over the remaining vesting period. For leave encashment, recognition is immediate under both frameworks — without amortisation.
One important nuance: if salary restructuring and a change in actuarial assumptions are happening at the same time, their impacts must be separately identified and treated. One becomes past service cost; the other becomes an actuarial gain or loss. They cannot be combined.
The Right Treatment Depends on When Your Reporting Period Falls
Timing guidance in this section is drawn from the ICAI Guidance (FAQs 7.3 and 7.4) and applicable accounting standards. Please confirm the treatment applicable to your specific circumstances with your auditors.
Not all organisations are in the same position. Where you are in your financial year determines what action you need to take — and how urgently.
If your period ends after 21 November 2025
The Labour Codes are operative. Increases in gratuity and leave obligations must be recognised — in both annual and interim financial statements.
Under Ind AS 34 / AS 25, interim financials follow the same policies as annual ones. The impact cannot be deferred to year-end.
If your period ended before 21 November 2025
The enactment of the Codes is a non-adjusting event for those financial statements.
No adjustment to amounts already recognised — but disclosure is required: the nature of the event and an estimated financial effect, where determinable.
Tax treatment
Tax deductibility of increased gratuity and leave obligations continues under existing Income-tax law.
Amounts deductible in the current year affect current tax expense. Amounts deductible in future years give rise to deferred tax assets under Ind AS 12, or timing differences under AS 22, subject to prudence.
8 Questions Your Auditors Will Ask. How Many Can You Answer?
ICAI's Guidance sets out a specific list of actions auditors are required to evaluate. This isn't a suggestion — it's the checklist your audit team will work through.
If your answer to several of these is "not yet" — that's your starting point. And that's where MYND comes in.
You Don't Have to Work Through This Alone
For over 24 years, MYND has helped 1,000+ organisations manage compliance, payroll, and finance operations with 99% accuracy. We've been tracking the Labour Code transition since the notification came through — across clients in manufacturing, services, retail, and technology. We know where the complexity sits.
Labour Code Impact Assessment
We tell you exactly where your wage structures, workforce classifications, and statutory computations are exposed — before your auditors do.
Payroll Reconfiguration
We update your payroll parameters to reflect the revised wage definition and expanded employee categories, so contributions are computed correctly from here on.
Actuarial Coordination
We work with actuarial firms to ensure your gratuity and leave valuations use the correct revised wage inputs, with the right accounting treatment applied.
Disclosure and Documentation Support
We help your Finance team prepare audit-ready financial statement disclosures and document all key judgements — so nothing is left to interpretation.
Ongoing Compliance Monitoring
As State-level Rules are notified, we track and update your compliance framework — so mid-year surprises don't become audit findings.
Across MYND Enterprise Solutions (managed services), MYNDX (payroll and HR technology), and MYND GIG (workforce solutions) — we bring an integrated view of how the Labour Codes affect your full employee lifecycle.
The Codes Are Live. The Audit Clock Has Started.
ICAI has positioned the New Labour Codes as a significant financial reporting and governance development — not a routine operational change. Management is expected to proactively assess impact, exercise informed judgement, ensure robust systems and controls, and support transparent and adequate disclosure.
The path forward is clear. The question is whether your team has the capacity and the clarity to move through it in time.
Frequently Asked Questions on the New Labour Codes
The Labour Codes are effective but State Rules haven't been notified yet. Do I still need to act?
Yes. The absence of State Rules does not defer your compliance obligation. Until State Rules are notified, existing rules and notifications continue to apply — but only to the extent they are not inconsistent with the Codes. Management cannot defer assessment or accounting impact while waiting for Rules.
How does the new wage definition affect our PF contributions specifically?
PF contributions are calculated on wages. Where the 50% exclusion cap is breached, the excess is deemed to be wages — which affects the base on which contributions are computed. ICAI's Guidance identifies PF and ESI contributions as among the six statutory computations directly affected by the revised wage definition.
We closed our financial year before 21 November 2025. Do we need to restate?
No. For financial statements relating to periods ending before 21 November 2025, the enactment of the Labour Codes is a non-adjusting event. You do not adjust the recognised amounts — but you are required to disclose the nature of the event and an estimated financial effect, where determinable.
Is the impact on gratuity recognised all at once or spread over time?
Under Ind AS, increases in gratuity liability arising from the Labour Codes are treated as a plan amendment, giving rise to past service cost — which is recognised immediately in the Statement of Profit and Loss. Under Indian GAAP (AS 15), vested past service cost is recognised immediately; unvested past service cost is amortised over the remaining vesting period.
How is MYND different from our internal team handling this?
Your internal teams carry existing workloads. A Labour Code impact assessment requires cross-functional coordination across HR, Finance, Legal, and Payroll — simultaneously. MYND brings dedicated specialists who have been working through this transition with clients across sectors, giving you a structured, audit-ready response without overloading your team.
This page has been prepared by MYND Integrated Solutions based on the ICAI Guidance Note on New Labour Codes. The accounting treatments and positions referenced are drawn directly from the ICAI Guidance and the FAQs issued by the Accounting Standards Board of ICAI. This content is for informational purposes only and does not constitute legal or professional advice. Please consult your legal, tax, and audit advisors for advice specific to your organisation.