Gratuity's new math under the Social Security Code

The Payment of Gratuity Act is gone

The Payment of Gratuity Act 1972 is repealed, under Social Security Code §164. Gratuity is now a Social Security Code entitlement, at §53.

Two things changed. First, the computation base: gratuity used to run on basic pay plus dearness allowance. It now runs on the unified “wages” definition from the Code on Wages — including the 50% deeming rule. See the 50%-rule guide for exactly how that base gets recomputed.

Second, eligibility for fixed-term employees. This is the bigger structural change.

Eligibility: five years, or one year on a fixed-term contract

The general qualifying period for gratuity stays at five years of continuous service — that part of the old law carries over into §53.

The new piece: fixed-term employees qualify after one year of service, pro-rata. There is no five-year requirement for fixed-term hires. This is confirmed by Ministry of Labour & Employment FAQ guidance and applies prospectively, on a last-drawn-wages basis, from 21 November 2025.

This single change removes what used to make short fixed-term contracts effectively gratuity-free. See fixed-term employment for the full hiring-decision implications.

The formula

Social Security Code §53 keeps the familiar formula: 15 days’ wages for every completed year of service, using a 26-day working month.

Gratuity = 15 ÷ 26 × (monthly wages) × (completed years of service)

The only thing that moved is what “wages” means inside that formula — see below.

Illustrative comparison: old basis vs new basis

Take an employee on ₹12,00,000 CTC, structured with basic at ₹4,20,000/year (₹35,000/month). This is the same structure worked through in the 50%-rule guide, where deemed wages come out to ₹50,000/month after the re-base.

A permanent employee exiting after 5 years:

• Old basis (basic only): 15 ÷ 26 × ₹35,000 × 5 = ₹1,00,962
• New basis (deemed wages): 15 ÷ 26 × ₹50,000 × 5 = ₹1,44,231
• Difference: +₹43,269, a 42.9% increase — from the wage re-base alone; nothing about the service period changed.

A fixed-term employee at the same pay, exiting after 2 years:

• Old position: not eligible — fixed-term hires needed five years, like everyone else, so gratuity was ₹0.
• New position: 15 ÷ 26 × ₹50,000 × 2 = ₹57,692.

The fixed-term case is the sharper shift. A cost that used to be zero for the typical 1–4 year fixed-term hire is now a real, accruing liability from month thirteen onward.

The tax side: the ceiling did not move

The Income-tax Act 2025 carries the gratuity exemption forward, from the old §10(10), into §19 of the new Act. Table Sl. 5 covers Gratuity Act-pattern computation with a ₹20 lakh ceiling; Sl. 6 covers other cases, at half of ten-month-average salary times years of service.

Neither ceiling moved when the Codes re-based the computation. That means: for most employees, the recomputed gratuity is still well inside the ₹20 lakh cap, and stays fully exempt. For long-service, higher-pay employees, a bigger Code-driven gratuity payout can now cross a cap that has stayed fixed. The amount above the cap becomes taxable salary to the employee.

This is easy to miss. It reads as good news for the employee — a bigger payout — until the tax on the excess becomes payable. Model it explicitly for anyone close to the ceiling before assuming a payout is fully exempt.

Funding and provisioning implications

Every leaver after 21 November 2025 who has completed five years of service — or one year on a fixed-term contract — now crystallises gratuity on the new, higher base. Actuarial provisions under AS 15 or Ind AS 19 need re-measurement this reporting cycle, not the next one. The liability applies from the commencement date, not from your valuation date.

Fixed-term hiring plans need review. If fixed-term employment was priced on the old, effectively gratuity-free assumption, that assumption is gone. Gratuity is now a real cost line from the second year of any fixed-term contract, and it should be in the budget for that role from day one.

Check your leave-encashment and retrenchment policies too. They run on the same re-based wages definition, so a gratuity review is a natural moment to check those calculations as well.

What is still settling

Most state governments have not yet finalised their own rules under the Social Security Code. The Central Rules of 8 May 2026 are final, but state-level detail is still moving — including some procedural aspects of gratuity administration. Where your establishment sits under state jurisdiction, confirm the current position rather than assuming the central text covers everything.

General guidance, not legal advice — confirm your specific structures and actuarial assumptions with India counsel or your actuary.