Gratuity Under the Code on Social Security, 2020: A Practical Employer Guide

Most payroll teams still refer to the Payment of Gratuity Act, 1972 out of habit, and understandably so. That statute governed gratuity for over five decades. But with the four labour codes taking effect on 21 November 2025, the old Act has been subsumed into the Code on Social Security, 2020. The concept of gratuity remains a statutory employment benefit, but several of the operational details that determine payout amounts and eligibility have shifted.

The New Statutory Home

Gratuity now sits in Chapter V of the Code on Social Security, spanning Sections 53 to 58. Payment and eligibility are dealt with at Section 53, continuous service at Section 54, and the determination of the amount at Section 56. The structural mechanism will look familiar to anyone who has worked with the earlier law, only renumbered.

This has an immediate documentary consequence. Appointment letters, gratuity policies, full and final settlement templates, and trust deeds drafted before late 2025 typically cite the 1972 Act. The intent behind those documents remains valid, but the legal citation does not. Any corporate instrument or HR policy dated after 21 November 2025 must reference the Code on Social Security, 2020.

Eligibility: The Fixed-Term Shift

Permanent employees continue to require five years of continuous service. Fixed-term employees, however, now qualify for gratuity on a pro-rata basis after just one year of service under their contract.

The five-year condition for permanent staff is not absolute. It is waived where an employee dies, in which case the nominee or legal heirs receive the benefit, and where an employee leaves on account of disablement. The Code also retains the specific exception for working journalists, who qualify after three years of continuous service.

Rounding of Service

Rule 33 of the Social Security (Central) Rules, 2026 settles the rounding mathematics for calculating the tenure of service. Any part of a year exceeding six months is treated as a full year. A fixed-term contract running one year and seven months therefore counts as two years for the final gratuity multiplier.

The Calculation and the Wage Question (Avoiding the Split-Calculation Trap)

The base formula remains 15 days’ wages for each completed year of service, calculated at the last drawn rate (or 7 days’ wages per season for seasonal establishments).

The substantive financial impact lies in how wages are defined. The labour codes adopt a single definition of wages with a 50 percent cap on exclusions. If excluded allowances (like HRA or conveyance) exceed half of the total remuneration, the excess amount must be added back to the wage base used for statutory calculations. Salary structures engineered with a low basic component and heavy allowances will automatically produce a higher wage base, resulting in a higher gratuity payout.

Employers must avoid a common misinterpretation regarding past service. Because gratuity is always calculated on the last drawn wages, there is no “split calculation” for employees exiting today. If an employee resigns in 2026, their final wage base is determined under the new 50 percent inclusion rule. That newly adjusted, higher wage is then multiplied by their entire continuous service tenure, including the years they worked prior to November 2025.

The Ceiling and the Tax Position

The maximum statutory gratuity payable remains capped at ₹20 lakh, as currently notified by the Central Government.

The same ₹20 lakh figure anchors the tax exemption framework. For employees covered by the gratuity law, the exempt portion is the lowest of three amounts: the formula-based figure, ₹20 lakh, or the amount actually received. Note that the Direct Tax Code has now been enacted as the Income Tax Act, 2025, which came into force on 1 April 2026. Tax and payroll teams must verify the updated section numbering under the new 2025 tax statute before filing returns or issuing Form 16s.

Payment Timelines

Gratuity must be paid within 30 days from the date it becomes payable. Delays attract simple interest at the notified government rate, unless the employee caused the delay and the controlling authority approved the delay in writing.

The 30-day window remains a strict compliance limit. The computation should be prepared as soon as an employee’s last working day is confirmed. The calculation sheet, the formal written notice of the determined amount, and the bank transaction record should be retained together, as inspecting authorities routinely ask for all three.

A Short Compliance Checklist [FREE]

A single review session with the policy file and salary master addresses most of the exposure:

• Update every reference from the 1972 Act to the Code on Social Security, 2020.
• Run each active pay structure through the 50 percent wage test to identify the true statutory wage base.
• Recompute balance sheet provisions for gratuity liabilities, as the new wage definition applies retroactively to the entire tenure of active employees.
• Track fixed-term contracts approaching their first-year anniversary.
• Audit and collect missing employee nomination forms.

Disclaimer: This content is for informational purposes only and does not constitute legal, financial, or professional advice. The information is based on the cited article and is subject to change. Readers are strongly advised to verify all details, including statutory provisions, eligibility criteria, wage definitions, calculation methods, tax treatment, and timelines, directly with official government sources or a qualified professional before taking any action. The author and publisher assume no liability for any loss or damage arising from reliance on this information.