Gratuity calculation in India: what changes under the Code on Social Security, 2020
The SS Code retains the 5-year rule for permanent employees but introduces pro-rata gratuity for fixed-term employees after one year of service. A clear transition roadmap for HR and finance teams.
The most material shift is for fixed-term employees (FTE). Under the 1972 Act, gratuity was payable only after 5 years of continuous service. Most fixed-term contracts ended before that threshold, so FTE rarely received gratuity. Section 53(2) of the SS Code now provides that gratuity is payable to FTE on a pro-rata basis on completion of one year of service.
For permanent employees, the 5-year rule continues. The waiver in cases of death or disablement is retained. Working journalists continue to qualify after 3 years of continuous service.
The definition of 'wages' moves to Section 2(88) of the SS Code. Wages mean all remuneration, with specific inclusion of basic pay, dearness allowance and retaining allowance. The 50 percent floor rule applies: if excluded components (HRA, conveyance, bonus, etc.) exceed half of total remuneration, the excess is added back to wages for gratuity computation.
| Aspect | Payment of Gratuity Act, 1972 | Code on Social Security, 2020 |
|---|---|---|
| Governing law | Payment of Gratuity Act, 1972 | Code on Social Security, 2020 (Sections 53 to 58) |
| Qualifying service (permanent employees) | 5 years of continuous service | 5 years of continuous service (unchanged) |
| Qualifying service (fixed-term employees) | Not separately recognised; FTE often missed the 5-year cut-off and lost gratuity | Pro-rata gratuity on completion of one year of service, irrespective of the 5-year rule |
| Death or disablement | 5-year rule waived | 5-year rule waived (unchanged) |
| Working journalists | 5 years | 3 years of continuous service |
| Wage base for calculation | Last drawn 'wages' as defined under the 1972 Act | Last drawn 'wages' as defined in Section 2(88) of the SS Code: all remuneration, with specific inclusion of basic, DA and retaining allowance, subject to the 50 percent wage-floor rule for excluded components |
| Statutory ceiling | Notified by Central Government (currently ₹20,00,000) | To be notified by Central Government under Section 4(3) of the SS Code |
| Time limit for payment | Within 30 days of becoming payable | Within 30 days of becoming payable; interest payable on delay |
How to calculate gratuity
Formula (monthly-rated employees)
Gratuity = (Last drawn wages × 15 × Completed years of service) ÷ 26
For seasonal establishments, replace 15 with 7. Service of 6 months or more in the final year is rounded up to a full year.
Permanent employee, 8 years 7 months
Last drawn wages: ₹60,000 | Years counted: 9
(60,000 × 15 × 9) ÷ 26 = ₹3,11,538
Service of 6 months or more in the final year is rounded up to a full year.
Fixed-term employee, 2 years (new under SS Code)
Last drawn wages: ₹45,000 | Years counted: 2
(45,000 × 15 × 2) ÷ 26 = ₹51,923
Earlier denied gratuity under the 1972 Act. Now payable on pro-rata basis after 1 year.
Seasonal establishment, 6 years
Last drawn wages: ₹30,000 | Years counted: 6
(30,000 × 7 × 6) ÷ 26 = ₹48,461
7 days of wages per completed season is used for seasonal establishments.
These are static illustrative examples. For an interactive calculation across permanent, fixed-term, working-journalist and seasonal employees, use the gratuity calculator.
Section 2(34) of the IR Code, 2020 defines a 'fixed term employment' worker as one engaged for a fixed period under a written contract, with the same benefits as a permanent worker on a pro-rata basis. Section 53(2) of the SS Code aligns gratuity with this principle.
- FTE qualify after 1 year of continuous service (no 5-year wait).
- Gratuity is calculated on the same 15/26 formula, pro-rated to actual completed years.
- Renewal of a fixed-term contract does not break continuity for gratuity computation.
- Contracts shorter than 1 year do not attract gratuity, even if renewed in a chain (subject to the anti-avoidance and continuity tests applied by courts).
- 1Map the FTE workforce: identify all fixed-term contracts and the date from which one year of service is completed.
- 2Re-baseline gratuity provision in books to include FTE pro-rata liability from the date the SS Code is enforced.
- 3Update the wage structure to align with the Section 2(88) definition: wages mean all remuneration, with specific inclusion of basic, DA and retaining allowance, subject to the 50 percent floor.
- 4Revise standing orders, appointment letters and HR policies to reflect the new gratuity entitlement for FTE.
- 5Reconfigure payroll and full and final settlement workflows to compute gratuity from year 1 for FTE.
- 6Review insurance: arrange compulsory gratuity insurance once the relevant section is notified.
- 7Train HR and finance teams on the revised wage definition and the new FTE rule.
Statute: SS Code, 2020 (Ch. V, Sec. 53 to 58)Sec. 53 to 58, SS Code 2020
Formula: (Wages × 15 × Years) / 26Sec. 4, Payment of Gratuity Act 1972
Permanent threshold: 5 yearsSec. 4(1), PG Act 1972
FTE threshold: 1 yearSec. 53(2), SS Code 2020
Ceiling: ₹20,00,000 (to be re-notified)Sec. 4(3), SS Code 2020
Payment deadline: 30 daysSec. 7(3), PG Act 1972
Frequently asked questions
Need help transitioning to the SS Code?
Our employment law team advises on gratuity provisioning, FTE policy redesign, payroll restructuring and standing-order updates aligned to the new labour codes.
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