For decades, there has been talk of the need to reform India’s labour laws. They were fragmented, outdated and complex, and failed to adequately protect its workers, particularly those in the informal sector. Overall, these laws made India less attractive for investment.
Last November four new codes came into effect: the Code on Wages, 2019; the Industrial Relations Code, 2020; the Code on Social Security, 2020; and the Occupational Safety, Health and Working Conditions Code, 2020. These consolidate 29 central labour laws.
Overall, the new codes strengthen workers’ rights. They redefine wages; put in place a fair methodology for fixing minimum wages; regulate working hours and weekly rest; mandate annual free health check-ups for factory, mine and construction-site workers; define overtime (more than 48 hours per week); and mandate crèche facilities (for establishments with 50 or more employees). They also extend social security to large sections of India’s workforce, including gig, platform and fixed-term workers.
The reclassification of wages has significant cost implications for employers
According to KPMG, these reforms create a more efficient regulatory framework for employers and employees. They also carry potential implications for workforce management, cost structures and operational processes.
Higher wage bill
The new code redefines wages by mandating that a minimum 50% of total remuneration an employee receives should include three components: basic pay, dearness allowance (a cost-of-living adjustment) and retaining allowance. These three components are collectively referred to as ‘wages’.
Traditionally, many companies have structured pay packages around the ‘cost to company’, with a large share made up of allowances and reimbursements. Under the Code on Wages, allowances such as house rent allowance, medical reimbursements and bonuses are excluded from wages. If wages fall below 50% of total remuneration, they are deemed to be 50% by default. This reclassification has significant cost implications for employers.
The labour codes have also altered gratuity rules. Previously, gratuity was payable only to permanent employees after they had served the company continuously for five years. Now, even fixed-term employees are eligible for gratuity after completing just one year of service.
Since gratuity is calculated as a proportion of wages, the revised definition of wages has led to higher gratuity payouts under the Code on Social Security, 2020. Gratuity is payable upon termination of employment due to retirement, resignation or retrenchment, and the revised definition has increased liabilities across sectors.
Accounting implications
In December, the Institute of Chartered Accountants in India (ICAI) issued a FAQ document on the new labour codes, clarifying that accounting standards such as Ind AS 34 and AS 25 require companies to recognise the resulting increase in their gratuity liabilities in their interim financial statements or results for the period ending 31 December 2025.
The ICAI’s guidance makes it clear that the impact of the new labour codes would be immediate, with little flexibility in timing or accounting treatment. Obligations related to gratuity and leave, once treated as long-term balance sheet items, have now become near-term profit and disclosure concerns.
The codes promote gender parity by allowing women to work night shifts
As companies reported their third-quarter results (October to December 2025), several flagged significant one-time hits linked to the new labour codes. India’s IT bellwether Tata Consultancy Services reported a nearly 14% drop in net profit to ₹106.57bn (US$1.2bn). HCL Technologies saw its profits fall by ₹9.56bn (US$105.4m). And Infosys reported a one-time exceptional hit of ₹12.89bn (US$142.1m).
The impact was not limited to IT companies. Oberoi Realty reported a one-time hit of ₹230.6m (US$2.5m) as part of a wage overhaul. Private banks, on the other hand, chose to set aside provisions towards their employee benefit obligations in their Q3 results. These range from ₹980m (US$10.8m) to ₹8bn (US$88.2m).
Fairer work, costlier jobs
The codes introduce greater fairness in the system in several ways. Most notably, they expand social security coverage to gig economy workers, platform workers and fixed-term employees – segments that have grown rapidly in recent years. Various aggregators (such as food delivery and ride-hailing platforms) are now required to allocate up to 2% of their turnover for the welfare of gig workers.
The codes also promote gender parity by allowing women to work night shifts (with appropriate safeguards) and prohibit discrimination on the basis of gender. They mandate appointment letters, cover commuting accidents and require timely payment of wages, overtime and reimbursements.
While these codes simplify hiring and retrenchments procedures to improve ease of doing business, they also introduce accountability and empathy into the way employers treat employees.
Brokerage firm Jefferies has cautioned that the impact of the labour codes could potentially raise employee costs by up to 5%.
For a country aspiring to become a developed nation by 2047, this may be an unavoidable cost. Growth without fairness and transparency only deepens inequality. And that’s unlikely to support India’s long-term development ambitions.
