Key Takeaways: India’s New Gratuity Rules 2025
- Effective Date: November 21, 2025 (legally enforceable across India)
- 50% Wage Rule: Salary for gratuity calculation must be minimum 50% of CTC for gratuity calculations
- Fixed-Term Employees: Now eligible for gratuity after just 1 year (down from 5 years)
- Accounting Treatment: Must recognize as past service cost in P&L immediately under Ind AS 19/AS 15
- Financial Impact: Expected 25-50% increase in gratuity liabilities for most Indian companies
- Geographic Scope: Applies nationwide, though states are finalizing implementation rules
Table of Contents
Implementation Status of India’s Labour Codes
The Social Security Code 2020 consolidates nine existing labour laws related to social security, gratuity, provident fund, and employee benefits into one unified code applicable throughout India. The four Labour Codes in India became legally effective from November 21, 2025, as announced through official government notification by the Ministry of Labour and Employment. The legal obligation under the new framework has commenced, which has important implications for financial reporting, actuarial valuation, and compliance for companies operating in India.
Refer to the official government notification from the Press Information Bureau of India for the complete details.
What Stays the Same Under India’s New Gratuity Rules
1. The Gratuity Benefit Formula
The fundamental gratuity calculation formula in India remains unchanged:
Gratuity = 15/26 × Eligible Salary × Years of Service
This formula has been the standard for gratuity calculation in India under the Payment of Gratuity Act, 1972, and continues under the Social Security Code 2020.
2. The Vesting Period for Permanent Employees
For regular permanent employees in India, the 5-year vesting period requirement continues unchanged. This means permanent employees must complete 5 years of continuous service to qualify for gratuity benefits.
3. The Maximum Gratuity Limit
The statutory maximum gratuity limit in India remains at ₹20,00,000 (Twenty Lakh Rupees), which was increased from ₹10 lakhs in 2018.
Major Changes in India’s Gratuity Calculation 2025
1. The Minimum 50% Wage Rule for Gratuity Calculation in India
Currently, many companies in India structure salaries with Basic + DA (Dearness Allowance) comprising just 30-40% of CTC (Cost to Company), with the balance paid as allowances such as HRA (House Rent Allowance), special allowance, conveyance allowance, etc. India’s new Social Security Code 2020 mandates that the eligible salary (now called “wages”) must constitute at least 50% of total CTC for gratuity calculation purposes. The wages can be higher than 50%, but cannot be lower. Specifically, if allowances exceed 50% of total remuneration, the excess amount must be reclassified and added back to “wages” for calculating gratuity, provident fund, and other statutory benefits in India.
Learn more about actuarial valuation of gratuity in India.
How the 50% Add-Back Rule Works: Example for Indian Employees
Scenario: Employee in India with ₹10,00,000 CTC and 10 Years of Service
| Salary Component | Amount (₹) | % of CTC |
|---|---|---|
| Basic + DA | ₹3,50,000 | 35% |
| HRA (House Rent Allowance) | ₹2,00,000 | 20% |
| Special Allowance | ₹3,50,000 | 35% |
| Other Allowances | ₹1,00,000 | 10% |
| Total Allowances | ₹6,50,000 | 65% |
| Total CTC | ₹10,00,000 | 100% |
Gratuity Calculation Comparison: Old Law vs New Social Security Code 2020
| Calculation Step | Old Law (Payment of Gratuity Act 1972) | New Law (Social Security Code 2020) |
|---|---|---|
| Salary structure | Basic + DA = ₹3,50,000 | Basic + DA = ₹3,50,000 (same) |
| Total allowances | ₹6,50,000 | ₹6,50,000 (same) |
| 50% Add-back Calculation | Not applicable | Step 1: 50% of CTC = ₹5,00,000 Step 2: Actual allowances = ₹6,50,000 Step 3: Excess allowances = ₹6,50,000 – ₹5,00,000 = ₹1,50,000 Step 4: Add excess back to Basic salary |
| “Wages” for gratuity calculation | ₹3,50,000 | ₹3,50,000 + ₹1,50,000 = ₹5,00,000 |
| Monthly wages | ₹29,167 | ₹41,667 |
| Gratuity formula application | (29,167 × 15/26) × 10 | (41,667 × 15/26) × 10 |
| Final Gratuity Amount | ₹1,68,990 | ₹2,40,385 |
| Increase in gratuity payout | – | +₹71,395 (42% higher) |
Key Points for Indian Employers and Employees:
- The actual salary slip issued by employers may remain unchanged initially (Basic still ₹3,50,000)
- However, for statutory calculation purposes under India’s labour codes, excess allowances (over 50% of CTC) must be added back to determine “wages”
- This is a mandatory statutory adjustment required by Indian law, not an optional restructuring
2. One-Year Eligibility for Fixed-Term Employees in India
Previously under the Payment of Gratuity Act 1972, employees on fixed-term contracts in India received no gratuity unless they completed 5 consecutive years of service – often impossible for project-based or annual contract roles common in sectors like IT, manufacturing, and consulting.
Under India’s new Social Security Code 2020, fixed-term employees qualify for gratuity after just 1 year of continuous service. The calculation formula and service rounding rules (6 months or more rounds up to a full year) remain unchanged – the only difference is the dramatically reduced eligibility threshold from 5 years to 1 year.
Example: Fixed-Term Employee Gratuity Calculation
Scenario: Fixed-term contract employee with 1.5 years of service, ₹3,00,000 annual salary
| Aspect | Old Law (Payment of Gratuity Act 1972) | New Law (Social Security Code 2020) |
|---|---|---|
| Eligibility requirement | 5 years continuous service | 1 year continuous service |
| Eligible for gratuity? | No (Only 1.5 years completed) | Yes (Exceeds 1 year minimum) |
| Service rounding | N/A (not eligible) | 1.5 years rounds to 2 years (6+ months rounds up) |
| Gratuity calculation | N/A | = (₹3,00,000 × 15/26) × 2 years |
| Gratuity payable at contract end | ₹0 | ₹34,615 |
| When payable | Never (contract ends before 5 years) | At contract termination or completion |
Actuarial Valuation Impact: How to Account for India’s New Gratuity Rules Under Ind AS 19 & AS 15
The new gratuity rules under India’s Social Security Code 2020 have material implications for companies conducting actuarial valuations of gratuity liabilities under Ind AS 19 (Employee Benefits) or AS 15 (Revised 2005) accounting standards.
Accounting Treatment for Indian Companies:
Since the Labour Codes became effective on November 21, 2025, any actuarial valuation with a measurement date on or after this date must incorporate these regulatory changes. Companies preparing March 31, 2026 financial statements need to account for the impact now.
The regulatory changes constitute a plan amendment, but accounting treatment differs between Ind AS 19 and AS 15 (learn more about the key differences):
1. Profit & Loss Impact (Past Service Cost)
Ind AS 19 companies: Recognize the entire gratuity liability increase immediately in the P&L when the law becomes effective (November 21, 2025), reported as Past Service Cost.
AS 15 companies: Split Past Service Cost into two components:
- Vested employees (permanent employees with 5+ years service, or fixed-term employees with 1+ year): Recognize immediately
- Unvested employees: Amortize over average remaining period until vesting
2. Balance Sheet Impact
Gratuity liabilities will increase substantially or more for companies with low Basic salary structures (30-40% of CTC) or substantial fixed-term workforces.
- Ind AS 19: Balance sheet reflects full liability increase immediately
- AS 15: Full Defined Benefit Obligation is calculated, but unvested Past Service Cost can be held as an unrecognized asset and amortized
In practice, unvested Past Service Cost is typically small, so most AS 15 companies will see nearly the full liability increase on their balance sheets.
Actuarial Valuation Process for India’s New Gratuity Rules:
Step 1: Prepare Employee Data for Indian Gratuity Valuation
- For your annual actuarial valuation as at March 31, 2026, and any other interim valuations before that date, you need to submit two sets of salary data for your employees in India:
- Current salary structure (as per old Payment of Gratuity Act 1972 rules)
- Restructured salary reflecting the new 50% wage definition under Social Security Code 2020
- You must include fixed-term employees in your employee data file, along with:
- Contract start date
- Intended contract termination/end date
- Current salary details
This enables the actuary to assess the gratuity liability for these employees under India’s new 1-year eligibility rule.
Step 2: Review Actuarial Valuation Report
- The actuarial valuation report prepared by your actuary should clearly set out the impact of India’s regulatory changes as Past Service Cost
- Request your actuary to provide the financial effects of the two regulatory changes separately:
- Impact of 50% wage rule
- Impact of fixed-term employee inclusion
This helps Indian companies better understand and communicate the financial impact to stakeholders.
- A detailed disclosure note will be needed for compliance, especially for companies following Ind AS 19, clearly explaining these regulatory changes specific to India
Estimated Financial Impact for Indian Companies:
Based on typical salary structures in India, companies with traditionally low Basic salary structures (30-35% of CTC) and significant fixed-term employee populations could see gratuity liabilities increase by 25-50% or more. The actual impact varies significantly based on:
- Current salary structure (percentage of Basic + DA in CTC)
- Industry sector and employee demographics
- Proportion of fixed-term employees in the workforce
- Average tenure of fixed-term employees
For personalized assessment, contact Numerica’s actuarial team specializing in Indian employee benefits.
Sample Disclosure Note for Indian Companies:
“Effective November 21, 2025, the Government of India implemented the Code on Social Security, 2020, which mandates that wages for gratuity calculation must comprise at least 50% of total remuneration and extends gratuity eligibility to fixed-term employees after 1 year of continuous service. The Company has remeasured its gratuity liability in accordance with Ind AS 19 (Employee Benefits), resulting in past service cost of ₹XX lakhs recognized in the Statement of Profit & Loss for the current period. The revised Defined Benefit Obligation as at [date] is ₹XX lakhs (Previous year: ₹XX lakhs). This increase of ₹XX lakhs is primarily attributable to (i) the revised wage definition under the new labour codes requiring a minimum 50% of CTC to be classified as wages (impact: ₹XX lakhs), and (ii) expanded employee coverage to include fixed-term employees with 1+ year of service (impact: ₹XX lakhs). The Company is in the process of restructuring salary components to ensure compliance with the new regulations.”
Action Items for Companies Operating in India
The new gratuity rules under India’s Social Security Code 2020 require immediate attention from finance and HR teams. Here’s a practical action plan:
| Action Item | Priority | Deadline | Responsible Team |
|---|---|---|---|
| Review current salary structures for 50% wage rule compliance | High | Immediate | HR/Finance |
| Identify all fixed-term employees with 1+ years of service | High | Immediate | HR |
| Conduct preliminary impact assessment on gratuity liability | High | December 2025 | Finance/CFO |
| Engage with actuarial consultant for India labour code impact analysis | High | December 2025 | Finance |
| Prepare employee data (old & new salary structure) for actuarial valuation | Medium | January 2026 | HR/Payroll |
| Discuss accounting treatment with statutory auditors | Medium | January 2026 | Finance |
| Complete actuarial valuation incorporating India’s new gratuity rules | High | Before March 31, 2026 | Finance/Actuary |
| Plan salary restructuring to increase Basic salary component | Medium | Q4 FY2025-26 | HR/Compensation |
| Update employment contracts and HR policies for Indian employees | Medium | Before April 1, 2026 | HR/Legal |
| Implement salary restructuring (if required) | Low | By April 1, 2026 | HR/Payroll |
| Communicate changes to employees with FAQs and clarifications | Medium | Ongoing | HR/Internal Comms |
For more information on how these changes affect your organization in India, explore our resources on employee benefits compliance in India.
Stay updated on India’s labour law changes by following the Ministry of Labour and Employment, Government of India website.
Sources:
- Press Information Bureau (PIB), Government of India – Release ID: PRID 2192524, dated November 21, 2025
- Ministry of Labour and Employment, Government of India – labour.gov.in
- Code on Social Security, 2020 – Official Text
Need Expert Guidance on India’s New Gratuity Rules?
Given the material impact on financial statements and employee benefits for companies operating in India, we recommend conducting a preliminary impact assessment immediately and coordinating with experienced actuaries for year-end valuations. The transitional period offers a strategic window to restructure compensation packages while ensuring full compliance with India’s new labour codes.
Numerica Consulting specializes in actuarial valuations and employee benefits consulting for companies across India. Our team can help you understand the implications of India’s new gratuity rules specific to your circumstances and develop strategies to manage costs effectively.