Gratuity under the Code on Social Security 2020 refers to a statutory social security benefit paid by an employer to an employee as a financial reward for long and continuous service rendered to the organisation. It becomes payable upon termination of employment due to retirement, resignation, superannuation, death, disablement, or completion of a fixed-term employment contract. Under the Code on Social Security, 2020, gratuity is generally payable after an employee completes five years of continuous service, except in cases of death, disablement, or expiry of a fixed-term contract, where the five-year condition is waived. The gratuity amount is calculated at the rate of 15 days’ wages for every completed year of service based on the employee’s last drawn wages.
Table of Contents
- Introduction
- Legal Framework
- Definitions
- Applicability of Provisions Related to Gratuity
- Eligibility and Conditions for Payment of Gratuity
- Entitlement to Gratuity on Death of an Employee
- Computation of Gratuity
- Grounds for Forfeiture of Gratuity
- Insurance for Gratuity
- Duty of Employer to Determine and Pay the Amount of Gratuity
- Disputes Regarding Gratuity
- Comparative Analysis of Payment of Gratuity Act, 1972 and Code on Social Security, 2020
- Conclusion
1. Introduction
Gratuity is one of the most important social security benefits provided to employees in India, recognising their long and dedicated service to an organisation. It acts as a financial reward paid by the employer when an employee leaves the organisation due to retirement, resignation, death, or disablement.
With the introduction of the Code on Social Security, 2020, the law relating to gratuity has been modernised and consolidated, replacing the earlier framework under the Payment of Gratuity Act, 1972. Gratuity is payable after 5 years of continuous service, and is calculated at the rate of 15 days’ wages for every completed year of service.
The new Code introduces important reforms such as pro-rata gratuity for fixed-term employees, compulsory gratuity insurance for employers, and clearer definitions of wages. These changes aim to strengthen employee welfare, improve transparency in computation, and enhance social security protection for workers.
2. Legal Framework
The Code on Social Security, 2020 (CoSS) consolidates and replaces several labour laws relating to social security, including the Payment of Gratuity Act, 1972. The Code came into effect on 21 November 2025, and provides a comprehensive framework governing gratuity, provident fund, employee insurance, maternity benefits, and other social security schemes.
Gratuity under the Code functions as a statutory right of employees, ensuring financial protection at the end of employment.
3. Definitions
3.1 Fixed-Term Employment
“Fixed term employment” means the engagement of an employee on the basis of a written contract of employment for a fixed period:
Provided that—
- his hours of work, wages, allowances and other benefits shall not be less than that of a permanent employee doing the same work or work of a similar nature; and
- he shall be eligible for all benefits, under any law for the time being in force, available to a permanent employee proportionately according to the period of service rendered by him even if his period of employment does not extend to the required qualifying period of employment.”
3.2 Wages
Wages means all remuneration, whether by way of salaries, allowances or otherwise, expressed in terms of money or capable of being so expressed which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment, and includes—
- basic pay;
- dearness allowance; and
- retaining allowance, if any,
but does not include—
- any bonus payable under any law for the time being in force, which does not form part of the remuneration payable under the terms of employment;
- the value of any house-accommodation, or of the supply of light, water, medical attendance or other amenity or of any service excluded from the computation of wages by a general or special order of the appropriate Government;
- any contribution paid by the employer to any pension or provident fund, and the interest which may have accrued thereon;
- any conveyance allowance or the value of any travelling concession;
- any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment;
- house rent allowance;
- remuneration payable under any award or settlement between the parties or order of a court or Tribunal;
- any overtime allowance;
- any commission payable to the employee;
- any gratuity payable on the termination of employment;
- any retrenchment compensation or other retirement benefit payable to the employee or any ex gratia payment made to him on the termination of employment, under any law for the time being in force:
Provided that for calculating the wages under this clause, if payments made by the employer to the employee under sub-clauses (a) to (i) exceeds one-half, or such other percent as may be notified by the Central Government, of the all remuneration calculated under this clause, the amount which exceeds such one-half, or the per cent. So notified, shall be deemed as remuneration and shall be accordingly added in wages under this clause:
Provided further that for the purpose of equal wages to all genders and for the purpose of payment of wages, the emoluments specified in sub-clauses (d), (f), (g) and (h) shall be taken for the computation of wages.
Explanation.—Where an employee is given in lieu of the whole or part of the wages payable to him, any remuneration in kind by his employer, the value of such remuneration in kind which does not exceed fifteen per cent. of the total wages payable to him, shall be deemed to form part of the wages of such employee;
3.3 Permanent Partial Disablement
Permanent Partial Disablement means, where the disablement is of a permanent nature, such disablement as reduces the earning capacity of an employee in every employment which he was capable of undertaking at the time of the accident resulting in the disablement:
Provided that every injury specified in Part II of the Fourth Schedule shall be deemed to result in permanent partial disablement[1].
3.4 Permanent Total Disablement
“Permanent Total Disablement” means such disablement of a permanent nature as incapacitates an employee for all work which he was capable of performing at the time of the accident resulting in such disablement.
Provided that permanent total disablement shall be deemed to result from every injury specified in Part I of the Fourth Schedule or from any combination of injuries specified in Part II thereof where the aggregate percentage of the loss of earning capacity, as specified in the said Part II against those injuries, amounts to one hundred percent[2].
3.5 Superannuation
“Superannuation”, in relation to an employee, means the attainment by the employee of such age as is fixed in the contract or conditions of service, as the age on the attainment of which the employee shall vacate the employment:
Provided that for the purposes of Chapter III, the age of superannuation shall be fifty-eight years.
3.6 Retirement
“Retirement” means termination of the service of an employee otherwise than on superannuation.
4. Applicability of Provisions Related to Gratuity
As per First Schedule of the Code on Social Security, 2020, Every factory, mine, oilfield, plantation, port and railway company and every shop or establishment in which ten or more employees are employed, or were employed, on any day of the preceding 12 months and such shops or establishments as may be notified by the appropriate Government from time to time are required to pay gratuity to their employees.
5. Eligibility and Conditions for Payment of Gratuity
Gratuity becomes payable after 5 years of continuous service when employment terminates due to:
- Superannuation
- Retirement
- Resignation
- Death
- Permanent disablement due to accident or disease
- Completion of a fixed-term employment contract
- Any other event notified by the Central Government.
However, the requirement of five years of service is waived in cases of:
- Death
- Disablement
- Expiration of fixed-term employment
For working journalists, the qualifying period is 3 years instead of five.
6. Entitlement to Gratuity on Death of an Employee
In case an employee dies, gratuity is paid to the nominee designated by the employee. If no nomination exists, the gratuity is paid to the legal heirs. If the nominee or heir is a minor, the amount is deposited with the competent authority, which invests it for the minor’s benefit until the minor attains majority.
7. Computation of Gratuity
Gratuity is calculated at the rate of 15 days’ wages for every completed year of service. If the service period exceeds six months, it is treated as a full year.
7.1 For Monthly Rated Employees
Gratuity = Last drawn monthly salary/26 × 15 × years of service
Note – Here, 26 represents the number of working days in a month.
Illustration – Let’s compare an employee’s gratuity under the old structure versus the new structure.
Employee Data:
- Total Monthly CTC – 1,00,000
- Years of Service – 10 Years
- Salary Split – Basic (Rs. 30,000) + Allowances (Rs. 70,000)
| Feature |
Old Law (Pre-2025) |
New Code (2026 ) |
| Wages Used for Calculation |
Rs. 30,000 (Basic only) |
Rs. 50,000 (Min. 50% of CTC) |
| Formula |
= 15/26*30,000*10 |
= 15/26*50,000*10 |
| Total Gratuity Payout |
Rs. 1,73,077 |
Rs. 2,88,461 |
7.2 Special Cases
7.2.1 Piece-Rated Employees
Daily wages are calculated based on the average wages of the last 3 months, excluding overtime.
7.2.2 Seasonal Employees
Gratuity is payable at the rate of 7 days’ wages for each season worked.
7.2.3 Fixed-Term Employees
Gratuity is paid on a pro-rata basis, even if the employee has not completed 5 years.
Illustration – In case the contract is for 1 year or a fixed-term employee works for 1 year, gratuity will be calculated for 1 year of service.
7.2.4 Employees Working After Disablement
If an employee continues working after becoming disabled at reduced wages, gratuity is calculated separately. For the period before disability, gratuity is calculated on the original salary and for the period after disability, gratuity is calculated on the reduced salary.
Illustration – An employee worked 6 years before disability with a salary of Rs. 30,000 and 4 years after disability with a salary of Rs. 20,000. In such a case, Gratuity will be calculated for 6 years based on Rs. 30,000 and for 4 years based on Rs. 20,000.
8. Grounds for Forfeiture of Gratuity
Gratuity may be partially or fully forfeited under certain circumstances.
It may be forfeited if:
- The employee causes damage or loss to the employer’s property due to wilful negligence. (Forfeiture limited to the extent of the loss)
- Employment is terminated due to riotous or violent conduct and acts involving moral turpitude committed during employment.
In Jaswant Singh Gill v. Bharat Coking Coal Ltd. (2006), the Supreme Court of India held that the provisions of the Payment of Gratuity Act, 1972 prevail over internal company rules. The Court ruled that gratuity is a statutory right payable upon retirement, and it cannot be withheld unless the specific conditions for forfeiture under the Act (Code) are satisfied. Since those conditions were not met, the forfeiture of gratuity after the employee’s retirement was held invalid.
9. Insurance for Gratuity
Under Section 57 of the Code on Social Security, 2020, employers must obtain insurance coverage to meet their gratuity liabilities.
9.1 Compulsory Insurance of Gratuity
Every employer (except government establishments) must obtain gratuity insurance from an authorised insurance company.
9.2 Exemption from Insurance
Employers may be exempt if:
- They already maintain an approved gratuity fund, or
- They employ 500 or more employees and establish an approved gratuity fund.
An approved gratuity fund has the same meaning as defined under Section 2(5) of the Income-tax Act, 1961.
9.3 Registration and Compliance
Employers must register their establishments with the competent authority and must obtain gratuity insurance or establish an approved gratuity fund.
The employer must immediately pay the gratuity amount, along with applicable interest, to the competent authority.
10. Duty of Employer to Determine and Pay the Amount of Gratuity
Once gratuity becomes payable, the employer must determine the amount and send a written notice to the employee or entitled person and the competent authority, even if no application is made for gratuity and must pay the gratuity within 30 days from the date it becomes payable.
10.1 Interest on Delayed Payment
If the employer fails to pay gratuity within 30 days, simple interest must be paid from the due date until the payment date, unless the delay is due to the employee’s fault and permission for delay has been obtained from the competent authority.
11. Disputes Regarding Gratuity
In case of dispute about the amount payable, eligibility, or the rightful recipient, the employer must deposit the admitted amount with the competent authority. The employer, employee, or any concerned person may apply to the competent authority to resolve the dispute.
After inquiry and hearing the parties, the competent authority decides the matter and directs payment of the amount due. During inquiry, the competent authority has powers similar to a civil court, including summoning persons, examining witnesses, and requiring documents.
11.1 Appeal Against the Order of the Competent Authority
Any person aggrieved by the decision of the competent authority may file an appeal within 60 days to the appropriate Government or designated authority.
An employer filing an appeal must first deposit the gratuity amount as required. The appellate authority may confirm, modify, or reverse the decision after hearing the parties.
12. Comparative Analysis of Payment of Gratuity Act, 1972 and Code on Social Security, 2020
|
Feature
|
Payment of Gratuity Act, 1972 (Previous) |
Code on Social Security, 2020 (Current)
|
| Primary Definition of “Wages” |
Basic Salary + Dearness Allowance (DA). |
Basic + DA + Retaining Allowance. |
| The “50% Wage Rule” |
No such rule; employers often kept Basic low to reduce payout. |
If allowances exceed 50% of total pay, the excess is added to “Wages.” |
| Eligibility for Gratuity |
5 years of continuous service. |
5 years of continuous service remains unchanged. |
| Eligibility for Fixed-Term Employees |
FTEs often received nothing. |
Payable on pro-rate basis. |
| Full & Final Settlement |
Within 30 days of the last working day. |
Within 2 working days of termination/resignation (as per Wage Code). |
| Gratuity Insurance |
Optional/Limited (State-specific notifications). |
Mandatory for all private employers to have insurance/approved fund. |
| Nomination Process |
Required, but often neglected. |
Mandatory filing within 30 days of completing 1 year of service. |
13. Conclusion
Gratuity is an essential pillar of employee welfare and social security in India. The Code on Social Security, 2020, modernises and consolidates the legal framework governing gratuity, ensuring greater clarity, broader coverage, and improved protection for employees.
By introducing provisions such as pro-rata gratuity for fixed-term employees, compulsory gratuity insurance, and standardised wage definitions, the Code strengthens workers’ financial security and enhances employers’ compliance responsibilities. As the labour law landscape evolves, understanding the provisions relating to gratuity becomes crucial for both employers and employees to ensure proper implementation and protection of rights.
[1] Section 2(55)
[2] Section 2(56)
The post [Analysis] Gratuity under Code on Social Security 2020 – Eligibility | Calculation | Key Rules appeared first on Taxmann Blog.
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