Key Takeaways: India’s New Gratuity Rules 2025
- Effective Date: November 21, 2025 (legally enforceable across India)
- 50% Wage Rule: Excluded payments such as HRA and conveyance allowance above half of total remuneration are added back to wages for gratuity calculations (section 2(88))
- Fixed-Term Employees: Now eligible for pro rata gratuity after just 1 year (down from 5 years), under the Industrial Relations Code’s definition of fixed-term employment and the Central Rules 2026
- Accounting Treatment: Must recognize as past service cost in P&L immediately under Ind AS 19; under AS 15 the vested part is recognized immediately and the unvested part amortized until it vests
- Financial Impact: Expected 25-50% increase in gratuity liabilities for most Indian companies
- Geographic Scope: Applies nationwide, though states are finalizing implementation rules
📌 November 2026 Update: This article reflects the Ministry of Labour FAQs (March 2026). The Draft Central Rules were published on December 30, 2025, and the final Central Rules were notified on May 8, 2026. They apply where the Central Government is the appropriate government; elsewhere State rules govern, and these remain unevenly notified. For detailed employer FAQs on wage definition ambiguities, see our companion article: New Labour Code FAQs And 50% Wage Rule Explained.
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.
Important: The 4 Years + 240 Days Rule
Under Section 2A of the Payment of Gratuity Act (retained under the Social Security Code), an employee who has completed 4 years and 240 working days (or 190 days for establishments with a 5-day work week) is deemed to have completed 5 years of continuous service. This interpretation has been upheld by the Supreme Court in the Surendra Kumar Verma case. This means employees nearing the 5-year mark may already be eligible for gratuity.
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.
4. Gratuity Payment Timeline
Companies are required to settle gratuity payments within 30 days of it becoming payable (upon termination, resignation, retirement, or death). Failure to pay within this period attracts simple interest at 10% per annum from the date it became payable until actual payment.
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 does not fix wages at a share of CTC. Instead, section 2(88) defines the eligible salary (now called “wages”) and adds back excluded payments above half of total remuneration for gratuity calculation purposes. Specifically, if excluded payments such as HRA and conveyance allowance exceed 50% of total remuneration, the excess amount must be added back to “wages” for calculating gratuity, provident fund, and other statutory benefits in India. The example below treats all the allowances shown as excluded payments. The treatment of a general special allowance is not settled: section 2(88) opens with “all remuneration” and does not list it as an exclusion, so some advisers treat it as wages, but the Ministry’s FAQs of 16 March 2026 say a payment that is not part of the section’s components is not considered for gratuity. Review each allowance against the section.
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 total remuneration (here, the ₹10,00,000 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 wages |
| “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 | (₹3,50,000 ÷ 12 × 15/26) × 10 | (₹5,00,000 ÷ 12 × 15/26) × 10 |
| Final Gratuity Amount | ₹1,68,269 | ₹2,40,385 |
| Increase in gratuity payout | – | +₹72,116 (43% 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 total remuneration) 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, the 5-year condition no longer applies to fixed-term employees, and gratuity is paid on a pro rata basis. The Code says only “pro rata”: the condition that fixed-term employees qualify for gratuity after just 1 year of service under the contract is in the Industrial Relations Code’s definition of fixed-term employment and the Central Rules 2026. Fixed-term employees are engaged directly on a written contract for a fixed period, so the term does not cover agency contract labour. The calculation formula remains unchanged. Under the Central Rules 2026, a further period of more than six months after the first year, but less than a full year, is rounded up to one additional year; the rule’s wording is unclear on a period of exactly six months. Some commentary reads “pro rata” as strictly proportional to time served, so where a State is the appropriate government, check the rules that apply.
Example: Fixed-Term Employee Gratuity Calculation
Scenario: Fixed-term contract employee with 1 year and 7 months of service, ₹3,00,000 annual salary (₹25,000 a month)
| Aspect | Old Law (Payment of Gratuity Act 1972) | New Law (Social Security Code 2020) |
|---|---|---|
| Eligibility requirement | 5 years continuous service | 1 year of service under the contract |
| Eligible for gratuity? | No (Only 1 year 7 months completed) | Yes (Exceeds 1 year minimum) |
| Service rounding | N/A (not eligible) | 1 year 7 months rounds to 2 years (a further period of more than 6 months rounds up) |
| Gratuity calculation | N/A | = (₹25,000 × 15/26) × 2 years |
| Gratuity payable at contract end | ₹0 | ₹28,846 |
| 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 not yet recognized is deducted from the balance sheet liability 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, under which excluded payments above half of total remuneration are added back to wages for gratuity calculation and fixed-term employees receive pro rata gratuity, with eligibility after 1 year of service under the contract. 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, which adds back excluded payments above 50% of total remuneration (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
- Ministry of Labour FAQs on Labour Codes – March 2026
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.
Last updated: November 2026
Topics: Employee Benefits
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December 11, 2025 at 11:42 am, Atul said:
Can you share the notification issued /gazette issued on the changes proposed /made
December 11, 2025 at 12:20 pm, V. Sivakumar said:
is Private retail sops like textile and jewellery shop employees are under this new labour code wo25.
December 12, 2025 at 10:26 am, MANJUNATHA K said:
i am working sew eurodrive india pvt ltd contract basic. 1.5 years completed salary 17200 rs graduti benefit available sir
December 25, 2025 at 9:21 am, Sanjay Suthar said:
excellent writeup and analysis with example..
December 31, 2025 at 7:47 pm, Nasrat Kamal said:
Thank you Sanjay!
December 30, 2025 at 11:02 am, N Krishnamurthy said:
1. Advise minimum number of employees required for gratuity eligibility in a established Proprietor/Partnership Firm/Private Limited Company in the absence of EPF and ESIC.
2. Is the retainer employees with continuous service eligible for gratuity?
December 30, 2025 at 11:04 am, N Krishnamurthy said:
Advise minimum number of employees required for gratuity eligibility in a established Proprietor Partnership Firm Private Limited Company in the absence of EPF and ESIC. Is the retainer employees with continuous service eligible for gratuity
January 2, 2026 at 8:59 pm, Jayanta A said:
Is the Gratuity amount maxed at 20 Lakh – meaning an employer has an obligation to give an employee maximum of 20L after retirement or resignation, or is it that 20L is the maximum gratuity which is tax free and employer has to give the gratuity amount as per the formula (Gratuity = 15/26 × Eligible Salary × Years of Service) and if the amount is more than 20L then the employee gets 20L as tax free and the remaining taxed at the slab for that year?
January 3, 2026 at 6:57 pm, Sanjay Suthar said:
Sirs / Team – happy to keep you posted – we have completed 120+ workshops on NLC – PAN INDIA – complimentary – voluntary fees – do let me know if i can be a resource person – unconditionally
very enlightened to see your write up
January 5, 2026 at 11:34 pm, Nasrat Kamal said:
20L is the minimum specified by the law. The Employer can give more to the employees, but only 20L can be tax-free in the hands of the employee.
January 7, 2026 at 7:06 pm, Kailas Said said:
Dear Sir
If gratuity amount is greater than 20 lakhs as new rules calculation. Employer can cap the same upto 20 lakhs and pay only 20 lakhs?
February 24, 2026 at 10:29 am, Bert said:
Sir,
By what effective date this new rules have been implemented?
What if the Organization mentions that they have not incorporated this yet in the company. Will it hold good?
February 24, 2026 at 10:47 am, Ganesh said:
My gratuity amount deducted from my from past 30 months, Because of some personal issues I left the company. Have I eligible to withdraw the gratuity deducted amount from my salary.
February 24, 2026 at 5:06 pm, Arvind said:
Long sarvice 5 yr + how benifits?
February 26, 2026 at 4:14 am, lokesh n said:
Sir my last working day was 31/01/2026 i serviced for 4 years 3 months in reliance industries limited can I eligible to get gratuity….hr mail it is implemented from April 2026 but in my CTC gratuity is displayed please do the needful
March 23, 2026 at 6:04 pm, Prabhat Kumar Gupta said:
30 वर्ष से ज्यादा की सर्विस पर प्रतिवर्ष क्या 45 दिन क़े वेतन क़े अनुसार गणना होती हैं या 15 दिन प्रति वर्ष.
और ग्रेच्युटी नियम में 30 वर्ष केबाद one half प्रति वर्ष क़े वेतन बराबर का सही अर्थ क्या हैं 🙏🙏
March 25, 2026 at 4:48 pm, Sharad Dadasaheb Kabadi said:
my service 15 years
last month May 2025 Basic +DA = 9737 WOKING DAYS 17 NOS
April 2025 Basic + Da = 17746
how to Calculate Gratuity
March 25, 2026 at 4:51 pm, Sharad Dadasaheb Kabadi said:
Last Month May 2025 Basis + DA = 9732 Working Day 17 Nos
April 2025 Basic + DA = 17746
SERVICE 15 YEARS
How To Calculated Gratuity
April 8, 2026 at 3:19 pm, Mathew Eappen said:
Is central or state government issued any notification about new labour code
April 20, 2026 at 2:09 pm, umesh kushal said:
Company grazvity not available in Blu volt services
August 11, 2026 at 5:22 pm, M Mallick said:
Will Management Trainee period be counted in the continuous service of 5 years ?I completed my service of 5 years in one company without service break
October 7, 2026 at 1:00 pm, vibhuti maru said:
Can an employee get gratuity benefit after the age of 60 years