1. What Is Gratuity? (Quick Refresher)
Gratuity is a lump-sum financial benefit paid by an employer to an employee for long-term service. Traditionally, employees became eligible after 5 years of continuous service under earlier laws.
It is payable on:
- Retirement
- Resignation
- Superannuation
- Death or disablement
The standard formula remains:
Gratuity = Last drawn salary × 15/26 × years of service
Maximum limit (unchanged): ₹20 lakh.
2. Major Change #1 — 1-Year Gratuity Eligibility (But Only for Some Employees)
One of the most important reforms under the labour codes is:
Fixed-term employees (FTEs) are now eligible for gratuity after just 1 year of continuous service, provided they complete at least 240 days in that year.
Earlier:
- All employees needed 5 years of service
Now:
- Permanent employees: still 5 years
- Fixed-term employees: only 1 year
The purpose is to ensure parity between contractual and permanent workers and discourage excessive contract hiring.
3. Major Change #2 — Expanded Definition of “Wages”
Under the labour codes, gratuity can no longer be calculated only on basic salary.
Instead:
- Wages include total remuneration minus specified exclusions
This expanded definition means:
- Higher wage base
- Higher gratuity payout
Example (as per financial analysis):
- Earlier wage base: ₹3,00,000
- New wage base: ₹3,95,000
- Result → gratuity increases significantly.
4. Major Change #3 — 50% Wage Rule Impact
Under the codes, if allowances exceed 50% of total remuneration, the excess amount is added back into wages for calculating benefits such as gratuity and PF.
👉 This prevents employers from lowering statutory benefits by shifting salary into allowances.
5. Major Change #4 — Wider Social Security Coverage
The new framework expands social security to additional categories, including:
- Fixed-term workers
- Gig workers
- Platform workers
- Migrant labourers
- Women employees
This marks a shift from traditional employment-only benefits to a broader workforce inclusion model.
6. Applicability — Are the New Rules Fully Active?
Key clarification:
- The labour codes became legally effective from Nov 21, 2025.
- Core definitions and provisions already apply.
- Some operational procedures depend on state rules.
So:
✔ Legal framework = active
⏳ Full procedural rollout = ongoing
7. Payment Timeline & Penalty
Employers must pay gratuity within 30 days of it becoming due.
Failure may attract 10% annual interest penalty.
8. Accounting Impact for Companies
Recent professional guidance indicates:
- Any increase in gratuity liability due to new codes must be recorded as past service cost in financial statements.
This may:
- Reduce short-term profits
- Increase compliance cost
- Require revised financial planning
9. Practical Impact on Employers
Companies should update:
- Salary structures
- Appointment letters
- HR policies
- Payroll systems
- Gratuity provisioning
Failure to align may lead to:
- Compliance risk
- Financial penalties
- Employee disputes
10. Practical Impact on Employees
Employees benefit through:
✔ Faster eligibility (for FTEs)
✔ Higher payout (expanded wage definition)
✔ Stronger social security
✔ Better protection against salary structuring tactics
11. Comparison — Old vs New Gratuity Rules
| Feature | Old Law | New Labour Codes |
|---|---|---|
| Eligibility | 5 years | 5 years (permanent), 1 year (FTE) |
| Wage Definition | Basic + DA | Expanded wage base |
| Allowance Limit | No uniform rule | 50% cap |
| Coverage | Limited categories | Wider workforce |
| Implementation | Central law | Central + State rules |
Final Thoughts
The new gratuity rules under India’s labour codes represent a major modernization of employee benefit law. While the five-year rule still applies to permanent staff, the introduction of 1-year eligibility for fixed-term employees and a broader wage definition significantly increases financial protection for workers.
For employers, the reforms mean higher compliance responsibility, revised payroll design, and potential cost increases. For employees, they signal a shift toward fairer and more inclusive social security.
