Investors scanning the latest Q3 earnings reports might have noticed a curious trend: several otherwise healthy companies are reporting lower-than-expected profits. The reason isn’t a market slump or operational failure—it’s a direct consequence of India’s sweeping new labour code gratuity impact. For the first time, the financial statements of major corporations are reflecting the true, and much higher, cost of employee gratuity under the reformed legal framework .
This isn’t just an accounting footnote; it’s a material hit to profitability that has sent ripples through the stock market. Companies across sectors—from IT and manufacturing to banking—are being forced to set aside substantial funds to meet their revised statutory obligations, creating a short-term pain for a long-term gain in social security.
Table of Contents
- What is the New Labour Code?
- Labour code gratuity impact: The Core Change
- Why Q3 Numbers Are Feeling the Pinch
- Sector-Wise Financial Impact
- What This Means for Employees and Investors
- Looking Ahead: Compliance and Future Outlook
- Conclusion: A Painful but Necessary Adjustment
- Sources
What is the New Labour Code?
The Indian government has been working for years to consolidate 29 complex, outdated central labour laws into four simple, unified codes. These are the Code on Wages, the Industrial Relations Code, the Occupational Safety, Health and Working Conditions Code, and the Code on Social Security .
The goal is to create a more business-friendly yet employee-protective environment, simplifying compliance for employers while expanding social security coverage for workers, including those in the gig economy. While the codes were passed in 2020, their full enforcement has been gradual, with key provisions like the revised gratuity rules only now coming into sharp financial focus for corporate India.
Labour code gratuity impact: The Core Change
Under the old Payment of Gratuity Act, 1972, gratuity was payable to employees who completed five years of continuous service. The new Code on Social Security has made a subtle but financially massive change: it mandates that the liability for gratuity must be accounted for from day one of an employee’s service, not just after they cross the five-year mark .
This shift from a contingent liability to an accrued liability is what’s causing the current financial tremor. In simple terms, companies can no longer wait until an employee is eligible to start planning for the payout. They must now calculate and provision for the entire future gratuity amount over the employee’s expected tenure, right from their first paycheck. This requires complex actuarial valuations and results in a significant, immediate increase in a company’s reported liabilities.
Why Q3 Numbers Are Feeling the Pinch
Fiscal Q3 (October-December 2025) is the first full quarter where many companies have had to fully implement these new accounting standards in their financial statements. The result is a wave of one-time, non-cash expenses hitting their profit and loss accounts.
For example, a large IT services firm with a young workforce might suddenly find its gratuity liability has doubled or even tripled on paper. To comply with accounting standards (Ind AS 19), they must recognize this increased liability, which flows directly into their expenses, thereby reducing their net profit for the quarter .
This is a classic case of regulatory compliance creating short-term financial volatility for long-term systemic stability.
Sector-Wise Financial Impact
The impact is not uniform across all industries. Sectors with specific workforce profiles are feeling the heat more acutely:
- Information Technology (IT): High employee turnover combined with a large base of young professionals means a massive recalibration of future liabilities.
- Manufacturing: Large, stable workforces with long tenures have always had high gratuity costs, but the new rules force a more precise and often higher valuation.
- Banking & Financial Services: These firms, with their structured career paths and long-serving employees, are seeing a notable uptick in their provisioning requirements.
- Startups & New-Age Companies: Many of these firms, previously operating in a grey area, are now being brought under the formal gratuity net for the first time, creating a new cost center.
What This Means for Employees and Investors
For employees, this is unequivocally good news. It means their gratuity—a crucial part of their retirement corpus—is now a legally secured and financially backed obligation from their very first day on the job. Their future is more secure than ever before [INTERNAL_LINK:employee-benefits-guide-india].
For investors, the message is more nuanced. While the immediate hit to profits is real, savvy investors see this as a one-time adjustment. Once the initial provisioning is done, future quarters should stabilize. In fact, this move enhances a company’s long-term risk profile by ensuring a major future liability is properly managed, which is a sign of strong governance .
Looking Ahead: Compliance and Future Outlook
Companies are now racing to update their HR and payroll systems, engage actuaries, and ensure full compliance. The Ministry of Labour & Employment has provided guidelines, but the onus is on businesses to get their calculations right.
Going forward, this change will likely lead to more transparent and responsible corporate accounting. It also sets the stage for a more robust social security net in India, aligning the country’s practices with global standards. The initial pain in Q3 is the price of building a more equitable and sustainable employment ecosystem.
Conclusion: A Painful but Necessary Adjustment
The labour code gratuity impact on Q3 corporate earnings is a stark reminder that major policy reforms have real-world financial consequences. While shareholders may wince at the short-term profit dip, the long-term benefits—for employee welfare, corporate governance, and the nation’s social fabric—are undeniable. This is not a crisis, but a necessary and overdue correction in how India values its workforce.