##GRATUITY (New Labour Code)

 

Gratuity Under the New Labour Code

 

India’s labour laws have recently been consolidated into four major labour codes. One important benefit that continues under this new system is gratuity, now governed by the Code on Social Security, 2020.

Gratuity is misunderstood—many believe it is a “bonus” or a “goodwill payment.” Legally, that is not correct.

Gratuity is a statutory right once an employee fulfils the required conditions.

 

 What Is Gratuity?

Gratuity is a one-time payment made by an employer to an employee as a reward for long and continuous service.

It becomes payable when employment ends due to:

• Retirement
• Resignation
• Superannuation
• Death
• Permanent disablement due to accident or disease
• If you serve an organisation for a sufficient period, the law requires your employer to pay you gratuity when you leave
• 
  

Who Is Eligible for Gratuity?

(a) General Rule – 5 Years of Service

An employee becomes eligible if they have completed:

• At least 5 years of continuous service with the same employer

Important exception:
The 5-year condition does not apply if the employee dies or becomes permanently disabled.

(b) New Rule for Fixed-Term Employees

One major change under the new labour code is that fixed-term (contract) employees are now clearly covered.

Under the Code on Social Security, 2020:

• Fixed-term employees are entitled to gratuity
• Eligibility starts after one year of service
• Gratuity is paid on a pro-rata basis
• The 5-year rule does not apply to them

 

How Is Gratuity Calculated?

For most employees, the legal formula is:

Gratuity = (Last drawn salary × 15 × Completed years of service) ÷ 26

Where:

• Last drawn salary = Basic Pay + Dearness Allowance
• 15 = 15 days’ salary for each year of service
• 26 = number of working days in a month

Rounding rule:
If an employee has worked more than 6 months in the last year, it is counted as a full year.
Example:

• 7 years 7 months → counted as 8 years

 

Maximum Gratuity Amount

The maximum gratuity payable under law is:

 ₹20,00,000 (₹20 lakh)

This is also the maximum amount exempt from income tax.

 

When Must Gratuity Be Paid?

Legally, the employer must pay gratuity:

• Within 30 days from the date it becomes payable

If the employer delays payment:

• Interest can be charged
• Penalties may be imposed
• Labour authorities can take action

From a legal risk perspective, delayed gratuity is one of the most common causes of labour disputes.

 

 Can Gratuity Be Forfeited?

Yes—but only in limited and serious situations.

Gratuity can be partly or fully forfeited if an employee is terminated for:

1.   Willful misconduct causing financial loss to the employer

2.   Riotous or disorderly behaviour

3.   An offence involving moral turpitude committed during employment

Important legal point:
Forfeiture is not automatic. It must be:

• Based on a proper disciplinary inquiry
• Supported by written findings
• Proportionate to the misconduct

Wrongful forfeiture can be challenged in court.

 

 What Has Changed from the Old Law?

Point	Old Law	New Labour Code
Governing law	Payment of Gratuity Act, 1972	Code on Social Security, 2020
Fixed-term employees	Not clearly covered	Clearly included
Minimum service	5 years	Relaxed for fixed-term staff
Maximum limit	₹20 lakh	₹20 lakh (unchanged)

 Legal Advice

For Employers

      Employers should:

• Update HR policies and appointment letters
• Budget for gratuity liability, including contract staff
• Maintain proper service records
• Ensure gratuity is paid on time
• Create a simple internal process for gratuity calculation

Ignoring gratuity rules can lead to:

• Legal notices
• Labour department action
• Financial penalties
• Damage to company reputation

For Employees

Employees should:

• Check their length of service and eligibility
• Calculate expected gratuity before resignation
• Submit a written gratuity claim if payment is delayed
• Seek legal advice if gratuity is wrongly denied

The new labour code does not weaken gratuity—it strengthens it.
By including fixed-term employees and tightening compliance rules, the law has made gratuity a clearer and more enforceable right.

For employers, gratuity is no longer just an HR formality—it is a legal obligation.
For employees, it is a valuable statutory benefit that must not be ignored.