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The legal framework governing gratuity in India has undergone a significant transition. With the Code on Social Security, 2020 coming into force on 21 November 2025, the erstwhile Payment of Gratuity Act, 1972 stands subsumed. For employers, this means a careful review of existing policies, appointment letters, and payroll practices is essential to ensure compliance with the new statutory provisions.
The New Legal Framework
Gratuity is now governed by Chapter V of the Code on Social Security, 2020, spanning Sections 53 to 58. While the core concept of gratuity as a terminal benefit remains unchanged, several operational details have been revised. Any employment documentation dated after 21 November 2025 should reference the new Code rather than the repealed 1972 Act.
Revised Eligibility Criteria
Under the new regime, permanent employees continue to require five years of continuous service to qualify for gratuity. However, a notable change applies to fixed-term employees, who are now eligible after completing just one year under contract. This revision is intended to bring fixed-term staff on par with permanent employees regarding terminal benefits.
The five-year service requirement is not absolute even for permanent staff. Exceptions apply in cases of death, where nominees or legal heirs receive the benefit, or in situations involving disablement. Additionally, when a fixed-term contract simply reaches its end date, the five-year condition is waived.
The Rounding Rule for Continuous Service
Rule 33 of the Social Security (Central) Rules, 2026 clarifies how part-years are treated. Any period exceeding six months within a year is counted as a full year for gratuity purposes. This provision resolves ambiguity in calculating benefits for employees with uneven service tenures.
Wage Definition and Calculation
Gratuity is calculated at 15 days’ wages for every completed year of service, or part-year exceeding six months, based on the last-drawn salary. Seasonal workers are entitled to seven days’ wages per season.
The critical shift lies in how wages are defined. All four labour codes now adopt a uniform definition that includes a 50% cap on exclusions. If excluded allowances exceed half of total pay, the excess amount is added back to the wage base for gratuity calculation. Employers with salary structures featuring low basic pay and high allowances may see an increased gratuity liability. Importantly, this new wage definition applies prospectively from 21 November 2025 and does not reopen calculations for earlier service periods.
Statutory Ceiling and Tax Treatment
The maximum gratuity payable is currently capped at ₹20 lakh, as notified by the Central Government. This ceiling also applies for tax exemption purposes. The tax-free portion is the lowest of three figures: the formula-based amount, the ₹20 lakh ceiling, or the actual amount paid. Employers should consult their tax advisors to confirm applicable provisions under the current Income Tax framework.
Timely Payment Obligations
Gratuity must be paid within 30 days from the date it becomes due. Delays attract simple interest at the notified rate unless the employee caused the delay and the controlling authority approved it in writing. Employers are advised to compute gratuity promptly upon an employee’s last working day and maintain thorough documentation, including calculations, notices, and payment records, for inspection purposes.
Compliance Checklist for Employers
A focused review can address most compliance gaps efficiently. Key action items include updating policy documents and appointment letters to reference the Code on Social Security, 2020, reviewing pay structures against the 50% wage test, identifying fixed-term contracts approaching their first year, revising gratuity provisions for service after 21 November 2025, and ensuring nomination forms are collected and updated.
Conclusion
While gratuity as a benefit remains familiar, the underlying rules on eligibility and wage computation have shifted. Employers who update their documentation and payroll processes now will be better positioned to manage exit claims without unpleasant surprises.
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, calculation methods, and deadlines, 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.