Old vs New Gratuity Rules Under the Social Security Code 2020

Understand the new gratuity rules under the Social Security Code 2020. Compare old vs new rules with eligibility, wage changes and PIB update dated 21 Feb 2025.

The Central Government has once again brought attention to the long-awaited Labour Codes by publishing a new Press Information Bureau (PIB) release on 21 November 2025 (PIB Release ID: PRID 2192524). This press note confirms that the four major Labour Codes, including the Code on Social Security, 2020, are ready for implementation and will come into force once the Government notifies the date.

Among the various provisions, the most important and widely discussed change relates to Gratuity—a retirement or exit benefit that every salaried employee in India looks forward to.

In this article, I will walk you through:

• How gratuity works under the current (old) law
• What will change under the new law
• Why fixed-term employees get a major benefit
• How the new “50% wage rule” increases gratuity
• Comparison of old vs new rules
• A practical example
• Official government source

This is a simple, straightforward, and easy-to-understand explanation aimed at helping employees, HR professionals, and financial planners.

Old vs New Gratuity Rules Under the Social Security Code 2020

1. What is Gratuity?

Gratuity is a lump-sum benefit paid by an employer to an employee as a token of appreciation for long-term service. It is payable:

• On resignation
• On retirement
• On termination
• Or to the nominee in case of death or disability

The gratuity system is governed TODAY by the Payment of Gratuity Act, 1972, and in the FUTURE by the Code on Social Security, 2020, once notified.

2. Old Gratuity Law: Payment of Gratuity Act, 1972 (Current System)

The present gratuity system continues until the Government notifies the new Code. Here is how the old law works.

2.1 Eligibility

An employee becomes eligible for gratuity only after completing 5 years of continuous service.
The exceptions are:

In such cases, the 5-year rule does not apply.

This rule applies to:

• Permanent employees
• Temporary employees
• Contract employees (if under employer supervision and control)

There is no special concession for fixed-term employees in the old system.

2.2 Wage Definition (Old Law)

Gratuity is calculated only on Basic Salary + Dearness Allowance (DA).

This allows companies to keep the Basic salary low (25–40%) and distribute the remaining CTC as allowances (HRA, special allowance, bonus, etc.), which reduces gratuity payouts.

2.3 Formula Under Old Law

The statutory formula for gratuity is:

Gratuity = (Basic + DA) × 15/26 × Number of Completed Years

Where:

• 15 = 15 days’ wages
• 26 = number of working days in a month

This formula has remained the same for decades.

Refer to the complete details about this old law on Gratuity at “Gratuity – New Limit, Eligibility, Formula, Taxation and Calculator“.

3. New Gratuity Law Under the Code on Social Security, 2020 (Yet to Be Implemented)

As per the PIB Press Release (PRID 2192524, dated 21 November 2025), the provisions of the Social Security Code, including gratuity rules, are finalized and ready for implementation.

Let’s understand what changes once the new law is notified.

3.1 The Gratuity Formula: No Change

The formula remains exactly the same:

Gratuity = Wages × 15/26 × Years of Service

However…

The definition of “Wages” changes drastically — and this is the game changer.

3.2 New Definition: Wages Must Be 50% of Total Salary

Under the updated “Wages Definition” (common to all labour codes):

• Wages = (Basic + DA + Retaining Allowance)
• All allowances combined cannot exceed 50% of total salary (CTC).
• If allowances are more than 50%, the excess is added back to wages.

This means:

• Companies will be forced to keep Basic at minimum 50% of CTC
• This will naturally increase the gratuity amount

This is one of the biggest financial impacts of the new labour codes.

3.3 Fixed-Term Employees Get a Major Benefit

For the first time in Indian labour law, the new Code introduces a special benefit:

Fixed-term employees become eligible for gratuity after completing just 1 year of service.

This was not available under the old law.

Why this is important?

Earlier:

• A fixed-term employee working 2–3 years (on repeated 1-year contracts) received no gratuity, unless they completed 5 years.

Now:

• If the contract is 1 year or more, gratuity becomes payable.

This is a massive benefit for employees in:

• IT sector
• Startups
• Manufacturing
• Gig and project-based industries
• EdTech
• Telecom
• Short-duration skill contracts

Regular employees, however, will continue to follow the 5-year rule.

4. Old vs New: Side-by-Side Comparison

Feature	Old Law (1972)	New Law (2020 Code)
Formula	Same	Same
Wage definition	Basic + DA	Basic + DA must be 50% of total CTC
Eligibility (Regular employees)	5 years	5 years
Eligibility (Fixed-term employees)	No special provision	Gratuity after 1 year
Impact on payout	Lower	Higher due to wider wage definition
Salary structuring flexibility	High	Restricted to protect employees
Allowances cap	Not applicable	Allowances capped at 50% of CTC

5. Example: Old vs New Gratuity Calculation

Let’s assume an employee earning a CTC of Rs.10,00,000 per year, having completed 10 years of service.

Old Law Scenario

• Basic = 35% of CTC = Rs.3,50,000
• Monthly Basic = Rs.29,167

Old gratuity:

= 29,167 × 15/26 × 10 = Rs.1,68,101

New Law Scenario (Mandatory 50% Wage Rule)

• Basic = 50% of CTC = Rs.5,00,000
• Monthly Basic = Rs.41,667

New gratuity:

= 41,667 × 15/26 × 10 = Rs.2,40,396

Increase: ~43%

This example clearly shows why the new law significantly increases gratuity benefits.

6. Practical Impact on Employees

6.1 Employees Benefit the Most

• Higher gratuity due to higher wage definition
• Fixed-term workers get covered
• Salary structuring becomes more employee-friendly
• More transparency and uniformity in compensation

6.2 Employers See Higher Costs

Companies may need to:

• Restructure salary components
• Increase Basic salary
• Bear higher gratuity outflows
• Adjust payroll and HR policies

This is one reason the implementation has been delayed.

7. Official Source: PIB Confirmation

The details mentioned above are directly based on the Government of India’s official press release:

Press Information Bureau (PIB)
Release ID: PRID 2192524
Date: 21 November 2025
Title: “Labour Codes Ready for Implementation”
Link: PIB Notification.

The PIB release confirms:

• Social Security Code, 2020 is final
• Provisions related to gratuity, wage definition, fixed-term employees are in place
• Implementation will follow notification by the Central Government

This makes the information fully valid and reliable.

8. Final Thoughts

The gratuity reforms under the Social Security Code, 2020 are some of the most employee-friendly changes in recent years. The two biggest benefits are:

1. Mandatory 50% wage definition  – Higher gratuity payouts

2. One-year eligibility for fixed-term employees – Expanded coverage

While the formula stays the same, the base (wages) becomes wider and stronger.

As we wait for the government to officially notify the implementation date, this PIB release assures us that the new gratuity rules will certainly come. Employees should understand these changes, and employers should prepare for the financial impact.

When implemented, these changes will bring more uniformity, fairness, and predictability to employee compensation in India.