Gratuity Act: Understanding Gratuity Under the Code on Social Security, 2020
Ask a payroll manager which gratuity act governs their company, and most will still say 1972. Fair enough. That law ran for over fifty years. But on 21 November 2025, the Code on Social Security, 2020, came into force with the other three Labour Codes, and the old Payment of Gratuity Act, 1972, went into the same basket as 28 other central laws. 1. The idea behind gratuity hasn’t changed a bit. A few of the details have, and they’re the ones that move money.
Why the Gratuity Act Question Matters Again
Open almost any appointment letter drafted before 2025. It’ll quote the 1972 Act. Same with gratuity policies, F and F templates and the trust deeds some companies keep. The intent behind those papers is fine. The citation isn’t.
The bigger issue sits in payroll, not paperwork. Fixed-term hires get gratuity much sooner now. And “wages” means something slightly different, which can push the base up for a lot of salary structures.
Chapter V: The New Address
Look up Chapter V of the Code. Sections 53 to 58.2 You’ll find payment at 53, continuous service at 54, and the sum itself at 56. The India Code has the text; it runs to a few pages, no more.
Old hands will spot the same skeleton, just renumbered. Any letter dated after 21 November 2025 ought to quote the Code, full stop.
Gratuity Act Eligibility: Who Gets Paid?
Permanent staff still need five years of continuous service. Fixed-term staff? One year under the contract is enough now, and the government has framed this as giving them parity with permanent employees. 1
Five years isn’t a hard wall even for permanent people. The Labour Ministry’s FAQs drop the condition when: 3
- An employee dies (the nominee or legal heirs are paid);
- Someone leaves on account of disablement;
- a fixed-term contract simply reaches its end date.
Continuous Service and the Rounding Rule
Then there’s the rounding rule, which settles plenty of arguments. Rule 33 of the Social Security (Central) Rules, 2026 treats any part-year over six months as a whole year. 4 So a fixed-term contract of 1 year 7 months? That’s two years for gratuity.
Working Out the Amount
It’s 15 days’ wages for every completed year, or part-year past six months, at the last-drawn rate. Seasonal workers get seven days’ wages a season.3
So far, nothing new. The twist is the wage figure. All four codes now use one definition of wages, and it comes with a 50% cap on exclusions: if the excluded allowances cross half of total pay, whatever’s over gets counted back in. Thin basic, fat allowances? Expect a bigger number. The Ministry says this works from 21 November 2025 onwards only. 3 Earlier service isn’t reopened.
Gratuity Calculation Example
Take Meena, a store supervisor, leaving after 9 years and 4 months on ₹36,000 a month. Four months doesn’t clear the six-month line, so it’s nine years.
| Item | Figure |
|---|---|
| Monthly wages | ₹36,000 |
| Daily rate (26-day divisor, as in the Income Tax Department’s computation) | ₹36,000 ÷ 26 |
| Days per year | 15 |
| Years counted | 9 |
| Gratuity | about ₹186,923 |
Your figures won’t match hers, of course. Check what divisor your policy and the rules call for.
The ₹20 Lakh Cap and Tax
Right now the most anyone can get is ₹20 lakh, which is the ceiling the Centre has notified, per the Ministry FAQs. 3. Tax uses the same number, by coincidence or design.
The tax ceiling traces back to CBDT’s Notification No. 16/2019 (S.O. 1213(E), 8 March 2019), which covers anyone who left on or after 29 March 2018.5 If the employee is covered by the gratuity law, the tax-free bit is the smallest of three: the formula amount, ₹20 lakh, or what was actually paid. One caution. The Income Tax Act, 2025, is now in force, so get your CA to confirm the new section number before it goes on a return.
Paying on Time
The 1972 Act gave employers 30 days from the date gratuity fell due. 6 Late? Simple interest at the notified rate, unless the employee caused the delay and the controlling authority had agreed in writing.
Thirty days is still a sensible outer limit. Do the sum as soon as someone’s last day is fixed. Then staple, so to speak, the working, the notice and the bank slip into one file. Inspectors almost always ask for the lot.
What HR Should Fix This Quarter
None of this needs a big project. One sitting with the policy file and the salary master clears most of it:
- Swap references to the 1972 Act for the Code on Social Security, 2020.
- Put every pay structure through the 50% wages test.
- Mark fixed-term contracts nearing their first year.
- Redo provisions for service after 21 November 2025.
- Chase missing nomination forms.
There’s a detailed note on how gratuity is calculated and paid under the Code, with forms and timelines. Teams juggling dozens of such duties tend to use compliance software that maps labour law duties to due dates.
Conclusion
Gratuity looks much the same on the surface. Underneath, eligibility for fixed-term staff and the meaning of wages have both shifted. Fix the letters, rerun the provisions, and exit claims – stop being a surprise.
Frequently Asked Questions
These come up in nearly every payroll review since the codes started. Each answer stands alone.
Is the 1972 Act Still Alive?
No. It got rolled into the Code on Social Security, 2020, on 21 November 2025. For gratuity, read Chapter V, sections 53 to 58.
How Soon Can Fixed-Term Staff Claim?
After one year under the contract. Any part-year over six months counts as a full year under Rule 33 of the Social Security (Central) Rules, 2026.
What’s the maximum gratuity at present?
₹20 lakh, the ceiling currently notified by the Central Government according to the Labour Ministry’s FAQs.
Does the New Wage Definition Apply to Old Service?
No. The Ministry says it runs prospectively from 21 November 2025.
End-Notes
All sources below are official government publications, accessed on 22 October 2026.
- https://digiliance.in/gratuity-act
- Press Information Bureau, release on the four Labour Codes, PRID 2192463: https://www.pib.gov.in/PressReleasePage.aspx?PRID=2192463
- Code on Social Security, 2020, India Code: https://indiacode.nic.in/handle/123456789/16823
- Ministry of Labour and Employment, FAQs on the Labour Codes (January 2026): https://www.labour.gov.in/static/uploads/2026/01/9fb60321f0028fc2fe08d3b3d8626dd7.pdf
- Labour Department, Government of Maharashtra, FAQs: https://labour.maharashtra.gov.in/en/faqs
- Press Information Bureau, CBDT notification on gratuity exemption, 8 March 2019: https://www.pib.gov.in/newsite/PrintRelease.aspx?relid=189273
- Payment of Gratuity Act, 1972, section 7: https://www.labour.gov.in/static/uploads/2025/06/23e3be0e31de495acd1698ed85007ec1.pdf
Written By: Digiliance Team, Spectra Outsource Solutions Pvt Ltd, Gurgaon, Haryana.
Phone: 9811396692
