# Gratuity Rules 2026 for Fixed Term Employees and the One Year Rule

> Source: https://krystal7.com/insights/gratuity-fixed-term-employees-code-on-social-security
> Publisher: Krystal7 Consultants (Krystal7 Innovations Private Limited), Gurugram, India
> Author: CA Nandini
> Published: 10 Feb 2026; updated 24 Oct 2026
> Summary: Under section 53 of the Code on Social Security, gratuity needs five years of service, or one year for fixed term staff, capped at INR 20,00,000.

*Written by CA Nandini Hasija, Krystal7 Consultants. Last updated 23 October 2026.*

## AI Overview Summary

- Section 53 of the Code on Social Security, 2020, in force from 21 Nov 2025, pays gratuity after five years of continuous service on superannuation, retirement, resignation or termination.
- A fixed term employee qualifies after one year of service under the contract (section 2(o), Industrial Relations Code). Additional FAQ 19 treats an 11 month contract as falling short.
- Gratuity is 15 days' last drawn wages for each completed year, or part year over six months, on the new Code wage definition. We compute 15 days' wages as monthly wages × 15 ÷ 26.
- The ministry's FAQ 12 gives the ceiling as INR 20,00,000. The employer must pay within 30 days of the date gratuity becomes payable, under section 56.
- For exits on or after 21 Nov 2025, gratuity uses last drawn Code wages. The ministry is silent on earlier years, so we price all years on those wages.

**Under section 53 of the Code on Social Security, 2020, in force since 21 Nov 2025, gratuity is payable after five years of continuous service. A fixed term employee qualifies after one year under the contract. Gratuity is 15 days' last drawn wages for each completed year, computed as monthly wages × 15 ÷ 26 on the new wage definition. The ministry gives the ceiling as INR 20,00,000, and the employer must pay within 30 days.**

This page covers eligibility, the one year rule, the formula with the new wage definition, the ceiling, forfeiture, nomination, payment and insurance. It ends with worked examples and the payroll actions a foreign owned subsidiary should take.

## What are the gratuity rules in 2026?

Gratuity now sits in Chapter V of the Code on Social Security, 2020, which replaced the Payment of Gratuity Act, 1972 on 21 Nov 2025. Section 53 sets eligibility, the formula and the ceiling. The main changes are the one year rule for fixed term staff and the new wage base.

The Government brought the Code into force on 21 Nov 2025 through S.O. 5319(E). The [Ministry of Labour and Employment announced the date that day](https://www.pib.gov.in/PressReleasePage.aspx?PRID=2192463). The ministry's [FAQs of 30 Dec 2025](https://www.labour.gov.in/static/uploads/2026/01/de4758d5bfeffc456d7de97a801891b0.pdf) say in FAQ 8 that the gratuity provisions apply from that date. The [Additional FAQs as on 16 Mar 2026](https://www.labour.gov.in/static/uploads/2026/03/a4ccf4c6d97c4f1f36a6d83f8c64213d.pdf) answer the questions payroll teams raised after the start.

The chapter applies to factories, mines, oilfields, plantations, ports and railway companies. It also covers any shop or establishment that employs, or employed on any day of the preceding 12 months, 10 or more employees. The ministry's [Compliance Handbook for Employers](https://www.labour.gov.in/static/uploads/2026/02/83978455025732b99b0165def80ab171.pdf) of February 2026 lists these thresholds in Annexure 5.

Under section 1(8), a chapter that applies once keeps applying, even if headcount later falls below 10. A subsidiary that grew to 12 people and shrank to 8 still owes gratuity.

| Point | Payment of Gratuity Act, 1972 | Code on Social Security, 2020 |
|---|---|---|
| Coverage | Establishments with 10 or more employees | Same threshold; coverage continues if headcount falls (section 1(8)) |
| Qualifying service | Five years, except on death or disablement | Five years, except on death, disablement, expiry of a fixed term contract or a notified event (section 53) |
| Fixed term staff | Five years like anyone else | One year under the contract (IR Code, section 2(o)) |
| Wage base | Basic pay plus DA | Code wages under section 2(88), with the 50% rule |
| Rate | 15 days' wages a year; monthly wages × 15 ÷ 26 | 15 days' wages a year on last drawn wages, or the number the Centre notifies (section 53; FAQ 12) |
| Ceiling | INR 20,00,000 as notified | As notified; INR 20,00,000 according to FAQ 12 of 30 Dec 2025 |
| Payment | Within 30 days of becoming payable | Within 30 days (section 56) |
| Nomination | Required | After one year of service (section 55) |

## Who is eligible for gratuity under the Code on Social Security?

An employee is eligible on termination of employment after at least five years of continuous service. The termination can be by superannuation, retirement, resignation, death, disablement, expiry of a fixed term contract, or another event the Centre notifies. The five year condition does not apply to death, disablement or fixed term expiry.

The ministry sets out the events in FAQ 10 and the exceptions in FAQ 11 of 30 Dec 2025.

| Event ending employment | Five years needed? | Who receives gratuity | Source |
|---|---|---|---|
| Superannuation | Yes | Employee | Section 53; FAQ 10 |
| Retirement or resignation | Yes | Employee | Section 53; FAQ 10 |
| Termination by the employer | Yes | Employee, subject to forfeiture rules | Section 53; FAQ 10 |
| Death | No | Nominee or legal heirs | Section 53; FAQ 11 |
| Disablement due to accident or disease | No | Employee | Section 53; FAQ 11 |
| Expiry of a fixed term contract | No, but one year under the contract is needed | Employee | Section 53; IR Code, section 2(o) |
| Event notified by the Central Government | No | As notified | Section 53; FAQ 11 |

"Employee" in section 2(26) of the [Code on Social Security](https://www.labour.gov.in/static/uploads/2025/07/b0620548445580767b5c0d18c95c26f7.pdf) carries a wage ceiling only in its first proviso, which refers to Chapter III, the provident fund chapter. Nothing in the definition applies a wage ceiling to Chapter V. So a country head on INR 1,00,00,000 a year earns gratuity on the same terms as an office assistant.

Apprentices engaged under the Apprentices Act, 1961 are not employees. Interns on a stipend under an employment contract usually are, so check how each internship is documented.

Service length uses section 2(17), which defines a completed year of service as continuous service for twelve months. Section 54, headed "Continuous service", sets out what counts as continuous. Read it for every borderline case, because the answer decides whether the fifth year is complete.

The 1972 Act deemed a year of continuous service where the employee actually worked 190 or 240 days in the preceding 12 months, depending on the establishment. Check the day counts in section 54 of the Code before you rely on a deemed year. If an exit falls a few weeks short of five years, test the service record against section 54 before you refuse gratuity. We pay in a close case, because a claim costs more than the gratuity.

## How does the one year rule for fixed term employees work?

A fixed term employee qualifies for gratuity after one year of service under the contract. Section 2(o) of the Industrial Relations Code, 2020 states this. Section 53 of the Code on Social Security waives the five year condition on expiry. The ministry confirms in Additional FAQ 14 that the year runs from the start of the contract.

The [Industrial Relations Code](https://www.labour.gov.in/static/uploads/2025/07/682a44b5426bff2c1f4943ee1b2fd566.pdf) defines fixed term employment as engagement "on the basis of a written contract of employment for a fixed period". Its provisos give three rights:

1. Hours of work, wages, allowances and other benefits not less than those of a permanent worker doing the same or similar work.
2. All statutory benefits of a permanent worker, in proportion to the period of service.
3. Gratuity if the worker "renders service under the contract for a period of one year".

Section 2(34) of the Code on Social Security defines fixed term employment for an "employee" rather than a "worker". Its provisos cover pay parity and proportionate benefits but do not mention gratuity. The one year gratuity proviso sits in the IR Code, which speaks of a "worker". The ministry's FAQs and the PIB factsheet apply the one year rule to fixed term employees generally, and we apply it to fixed term managers too.

The ministry has answered four practical questions:

- **Eleven months.** Additional FAQ 19 asks about an 11 month contract. The reply requires one year of service under the contract, so 11 months falls short.
- **Direct hires only.** Fixed term employment covers only employees the employer engages directly (Additional FAQ 10).
- **Contract labour.** For staff supplied by a contractor, the contractor pays gratuity after five years of continuous service (Additional FAQ 16).
- **Pro rata.** FAQ 12 says fixed term employees are paid gratuity on a pro rata basis. The [PIB factsheet on the Code](https://www.pib.gov.in/FactsheetDetails.aspx?Id=150473) of 22 Nov 2025 says it applies on a proportionate basis.

Neither the FAQs nor the factsheet explain pro rata. It could mean exact months of service. It could also mean the usual rule, where a part year over six months counts as a full year. The two give different answers, and neither is always higher, as scenario 2 below shows. Until the rules or a court settle it, we pay the higher of the two.

Two more points shape contract design:

- **Renewals.** If you renew a fixed term contract without a break, we count service from the first contract. An 11 month contract renewed for another 11 months is 22 months of service. Treating each contract as separate invites a claim of artificial breaks.
- **Expiry is not retrenchment.** Section 2(zh)(iv) of the IR Code excludes termination on completion of the fixed term. No retrenchment notice or compensation is due when the contract simply ends. Ending it early is a different case, covered in our note on [termination and retrenchment under the IR Code](/insights/termination-retrenchment-industrial-relations-code).

## How is gratuity calculated with the new wage definition?

Gratuity is 15 days' wages for every completed year of service, or part of a year over six months, on the wages last drawn. For a monthly paid employee, we compute 15 days' wages as monthly wages divided by 26 and multiplied by 15. Wages now mean Code wages under section 2(88), including any excess allowances added back under the 50 percent rule.

The formula we use for a monthly paid employee is:

Gratuity = last drawn monthly Code wages × 15 ÷ 26 × years of service

The divisor 26 is the convention of the old Payment of Gratuity (Central) Rules, 1972. The ministry's FAQs do not state a divisor. The Social Security (Central) Rules, 2026 supersede the 1972 Rules, so check them if a different method applies. FAQ 12 of 30 Dec 2025 sets out the special cases.

| Employee type | Daily or periodic wage used | Rate | Source |
|---|---|---|---|
| Monthly rated | Monthly Code wages ÷ 26, by convention | 15 days a year | Section 53; FAQ 12 |
| Piece rated | Average daily wages over the three months before termination, without overtime | 15 days a year | FAQ 12 |
| Seasonal employee | Daily wages | 7 days for each season | FAQ 12 |
| Fixed term employee | Monthly Code wages ÷ 26 | 15 days a year, pro rata | FAQ 12; PIB factsheet |
| Deceased employee | Monthly Code wages ÷ 26 | 15 days a year, pro rata, paid to the nominee | FAQ 12 |
| Employee employed again on reduced wages after disablement | Wages before disablement for that period; reduced wages after it | 15 days a year | FAQ 12 |

The wage base is where the Code bites. Under the 1972 Act, gratuity used basic pay plus DA. Under the Code, it uses Code wages, which are at least half of total remuneration when excluded allowances are large. Additional FAQ 6 says the new definition applies to gratuity from 21 Nov 2025.

Additional FAQ 13 says a payment outside the components of section 2(88) does not count for gratuity. So ESOPs, RSUs, variable pay and reimbursements stay out, consistent with FAQ 3 of 30 Dec 2025. A fixed special allowance is disputed: the ministry reading tests it in the 50 percent pool, while the statutory text counts it in full. Our guide to the [Code on Wages and the 50 percent wage rule](/insights/code-on-wages-50-percent-wage-rule-salary-structure) works through both readings.

We use 26 whatever the month. The 26 day convention assumes four weekly holidays a month, and a subsidiary that works five days a week still uses it. Apply the same divisor to every employee, and record the choice in the payroll file.

## Does past service before 21 Nov 2025 use the new wages?

We price it that way for exits on or after 21 Nov 2025. Additional FAQ 17 says gratuity is based on the wages last drawn at exit, under the Code on Social Security. The formula multiplies those wages by years of service, so we reprice years served under the 1972 Act at the new wage base.

The ministry does not say in terms how years before 21 Nov 2025 are treated. FAQ 8 of 30 Dec 2025 and Additional FAQ 11 say only that gratuity applies from 21 Nov 2025. An employee who left before that date was paid under the 1972 Act on the old wage base. For an employee who leaves on or after it, we take the prudent reading: last drawn Code wages for the whole service. Ask your actuary and auditor to confirm that reading.

This creates an accounting question for most foreign owned subsidiaries. The liability for service already rendered may jump on 21 Nov 2025. FAQ 9 says establishments "may make provision as per accounting norms".

In our view the jump is past service cost under AS 15 or Ind AS 19, recognised in the year that includes 21 Nov 2025. For a 31 March year end, that is FY 2025-26. For a parent with a December year end, it is calendar 2025, so group reporting under IAS 19 or ASC 715 may also pick it up. Brief the actuary to apply Code wages, and give the parent's reporting team the number before the audit. Our note on the [statutory audit of a foreign owned subsidiary](/insights/statutory-audit-foreign-owned-indian-subsidiary) covers what auditors ask for.

## What is the gratuity ceiling in 2026?

The ministry's FAQ 12 of 30 Dec 2025 says the maximum gratuity is as notified by the Central Government, "currently ₹ 20 lakhs". The 1972 Act's ceiling reached INR 20,00,000 by Notification No. 1420(E) of 29 Mar 2018, as the [Income Tax Department's page on tax free incomes](https://www.incometaxindia.gov.in/w/tax-free-incomes) records. Check the Gazette for any newer notification before you rely on the figure.

Two rules sit around the ceiling:

- **Better terms survive.** FAQ 13 says nothing affects an employee's right to better gratuity terms under an award, agreement or contract. A parent that promises uncapped gratuity in the offer letter must pay it.
- **Only a notification moves the cap.** The ministry says the Central Government sets the maximum. Treat any higher figure quoted elsewhere as inapplicable until a notification issues.

Income tax follows its own limit. Under section 10(10)(ii) of the Income Tax Act, 1961, a private sector employee covered by the Payment of Gratuity Act, 1972 is exempt up to the lowest of three figures. They are the statutory formula amount, INR 20,00,000 and the amount received. Section 10(10)(iii) applies a limit of INR 10,00,000 to employees not covered by that Act. The Income Tax Act, 2025 took effect on 1 Apr 2026. Read its exemption for gratuity, and how it refers to the Code on Social Security, before you compute tax on gratuity paid from that date. Gratuity above the exempt limit is taxed as salary, and the employer deducts tax on it when paying.

## When can gratuity be forfeited?

Gratuity can be forfeited only on grounds the law names, and Chapter V of the Code on Social Security, 2020 is the source for them today. Read the Code's forfeiture provision in the Gazette text before you withhold any amount. The Payment of Gratuity Act, 1972 allowed forfeiture for damage to the employer's property, up to the loss. It also allowed it, wholly or partly, for riotous or disorderly conduct, violence, or an offence involving moral turpitude committed at work.

Three rules guide our practice:

1. **Termination must come first.** Forfeiture follows a termination for the stated misconduct. An employee who resigns while an inquiry is pending has not been terminated for it.
2. **The ground must be on record.** The termination order should name the conduct, and the inquiry file should prove it. A general "loss of trust" does not support forfeiture.
3. **Damage forfeiture is limited to the loss.** You can withhold only the amount of the damage you can quantify. The rest is payable within 30 days.

For moral turpitude, we look for conduct that amounts to an offence, not just misconduct. Where criminal proceedings are pending, we hold the disputed part and pay the rest, and record the reason in the notice to the employee.

## How does gratuity nomination work?

Under section 55 of the Code on Social Security, each employee who has completed one year of service must make a nomination. The appropriate Government prescribes the time and manner. On death, gratuity goes to the nominee or the legal heirs, according to FAQ 11 of 30 Dec 2025.

The Compliance Handbook confirms the one year condition and section 55. Rule 2 of the [Social Security (Central) Rules, 2026](https://www.labour.gov.in/static/uploads/2026/05/49aa9b62c2125499c37399b90e969d67.pdf) (G.S.R. 344(E) of 8 May 2026) defines nomination by reference to section 55. Where the state is the appropriate government, check its rules for the form.

Section 2(33) defines "family" as the spouse, dependent children, certain dependent parents and, in some cases, a minor sibling. We ask employees who have a family to nominate family members, and we check the prescribed form for any limit on other nominees.

FAQ 11 adds a rule for minors. A minor's share is deposited with the competent authority and invested in a bank or financial institution until the minor comes of age. So never pay a minor's share to a guardian directly.

We collect nominations at the one year anniversary, as the section requires. People marry, have children and change their minds, so we ask for an update after every life event the employee reports for insurance.

## When must gratuity be paid and what if it is late?

The employer must pay gratuity within 30 days of the date it becomes payable, under section 56 of the Code on Social Security. Section 56 is headed "Determination of amount of gratuity". We determine the amount and write to the employee on exit, without waiting for an application, as the 1972 Act required. That Act charged simple interest on late payment at a rate the Centre notified. Check section 56 and the Social Security (Central) Rules, 2026 for the interest that applies now.

The steps we follow are these:

1. The employee applies to the employer in the prescribed manner. We do not wait for it, and we start the determination on exit.
2. As soon as gratuity becomes payable, we determine the amount and give written notice to the employee.
3. We pay within 30 days of the date gratuity became payable.
4. If payment is late, we check section 56 and the Rules for the interest due before we pay, and we do not assume it is nil.
5. A dispute about the amount or entitlement goes to the competent authority under section 58.
6. An appeal against its order lies to the appellate authority that the Rules define. Check them for the time limit and any deposit.

We treat gratuity as payable on the date employment ends. For a resignation, that is the last working day, not the day the employee submitted the resignation. Final wages have a shorter clock. Section 17(2) of the [Code on Wages](https://www.labour.gov.in/static/uploads/2025/06/c328da14bbb15fc4ad571dc33e7a4ab3.pdf) requires them within two working days.

A parent's global settlement process often waits for an exit checklist and a laptop return. That does not stop the 30 day clock. We pay the undisputed amount on time and settle recoveries separately.

## Do employers need gratuity insurance or a gratuity fund?

It depends on section 57 of the Code, headed "Compulsory insurance", and on any notification under it. Check the text and the notifications of the Centre and your state before you leave the liability unfunded. Many foreign owned subsidiaries fund gratuity anyway, through an insurer or a trust.

The common choices are these:

- **Unfunded provision.** The company books the actuarial liability and pays from cash on exit. It is simple, but a large exit can strain cash.
- **Group gratuity policy with an insurer.** The company pays premiums to a life insurer, which pays the benefit on exit. Most mid sized subsidiaries use this route.
- **Approved gratuity fund.** The company sets up a trust that invests contributions and pays benefits. The trust needs trustees, accounts and approval under income tax law.

A funded scheme does not change the employee's rights. If the insurer pays less than the Code requires, the employer pays the gap. When the wage base rose on 21 Nov 2025, many group policies were still priced on basic pay. Ask the insurer to revalue on Code wages and to fund the past service gap.

## What payroll actions should a foreign owned subsidiary take?

Recompute Code wages for every employee, rerun the gratuity valuation on those wages and fix the exit process so gratuity leaves within 30 days. Then rewrite fixed term contracts for the one year rule and collect nominations. The table assigns each action to an owner.

| Action | Owner | Deadline or trigger | Source |
|---|---|---|---|
| Compute Code wages for each employee under both readings of the 50% rule | Payroll | Now, and at each salary revision | Code on Social Security, section 2(88) |
| Revalue gratuity on Code wages and book past service cost | Finance and actuary | Accounts for the year that includes 21 Nov 2025 | Additional FAQ 6 and 17; FAQ 9 |
| Revalue the group gratuity policy or fund | Finance | Next premium date | Section 53; insurer terms |
| Rewrite fixed term contracts for parity and one year gratuity | HR and legal | Before the next hire or renewal | IR Code, section 2(o) |
| Track fixed term service across renewals | HR | Each renewal | Additional FAQ 14 |
| Collect nominations after one year of service | HR | One year anniversary | Section 55 |
| Issue the determination notice on each exit | Payroll | As soon as gratuity becomes payable | Section 56 |
| Pay gratuity | Finance | Within 30 days of the exit date | Section 56 |
| Pay final wages | Payroll | Within two working days | Code on Wages, section 17(2) |
| Update the cost plus budget for the parent | Finance | Next intercompany budget | Intercompany agreement |

The last row matters for captive service companies. Higher gratuity raises the cost base, so the mark up billed to the parent must rise too. Our [payroll management team](/services/payroll-management.html) builds these steps into the monthly close.

## What changed in 2026

Gratuity moved to the Code on 21 Nov 2025, and the ministry filled in the detail during 2026. The table lists each change by date and instrument.

| Date | Old position | New position | Instrument |
|---|---|---|---|
| 21 Nov 2025 | Payment of Gratuity Act, 1972; five years for every employee; basic plus DA | Code on Social Security, Chapter V; one year for fixed term staff; Code wages | S.O. 5319(E); IR Code, section 2(o) |
| 22 Nov 2025 | No official note on fixed term gratuity | One year rule and proportionate basis explained | PIB factsheet on the Code on Social Security |
| 30 Dec 2025 | No ministry reading of Chapter V | Events, exceptions, formula, INR 20,00,000 cap and better terms restated | MoLE FAQs 8 to 13 |
| 16 Mar 2026 | Open questions on past service, fixed term periods and contract labour | Gratuity on last drawn Code wages at exit; one year from contract start, so 11 months falls short; contractor pays contract labour | MoLE Additional FAQs 6, 10, 13, 14, 16, 17 and 19 |
| 8 May 2026 | Payment of Gratuity (Central) Rules, 1972 | Social Security (Central) Rules, 2026 in force and supersede the 1972 Rules; nomination defined under section 55 | G.S.R. 344(E) |
| 17 Sep 2026 | PF ceiling INR 15,000 | PF ceiling INR 25,000, which changes total remuneration for the 50% test | S.O. 5109(E) |

The PF change affects gratuity indirectly. Employer PF counts in total remuneration for the 50 percent test under Additional FAQ 1. A higher PF contribution therefore moves Code wages slightly for staff whose structures sit near the line. The [ministry's release of 23 Sep 2026](https://www.pib.gov.in/PressReleasePage.aspx?PRID=2313829) records the new ceiling.

## Worked example

**Scenario 1. A permanent employee resigns.** An engineer at the Bengaluru subsidiary of a US company joined on 1 Mar 2019. Her last working day is 30 Sep 2026. PF is restricted to the INR 25,000 ceiling.

Her service is 7 years and 7 months. The part year exceeds six months, so it counts as a full year, giving 8 years.

| Last drawn pay (INR a month) | Amount | Treatment |
|---|---|---|
| Basic pay | 60,000 | Wages |
| HRA | 30,000 | Excluded, clause (f) |
| Special allowance | 70,000 | Disputed between the two readings |
| Leave travel allowance | 5,000 | Excluded, clause (d) |
| Employer PF at 12% of INR 25,000 | 3,000 | Excluded, clause (c) |
| Total remuneration for the test | 1,68,000 | Gratuity and ESI stay outside |

**Step 1. Compute Code wages.** Half of total remuneration is INR 84,000. Under the ministry reading, the tested pool is INR 1,08,000, which exceeds half by INR 24,000. Code wages are INR 84,000.

Under the text reading, the special allowance counts as wages, giving INR 1,30,000. The excluded pool is INR 38,000, below half, so nothing more is added.

**Step 2. Compute gratuity on each wage base.**

- Old law, on basic pay: INR 60,000 × 15 ÷ 26 × 8 = INR 2,76,923.
- Ministry reading: INR 84,000 × 15 ÷ 26 × 8 = INR 3,87,692.
- Text reading: INR 1,30,000 × 15 ÷ 26 × 8 = INR 6,00,000.

All three figures sit below INR 20,00,000. The subsidiary pays at least INR 3,87,692 by 30 Oct 2026, 30 days after the exit date. Under the text reading, the employee could claim a further INR 2,12,308.

**Step 3. Check the accounts.** On the ministry reading, the gratuity accrual for this employee is INR 4,038 a month (INR 84,000 × 15 ÷ 26 ÷ 12). On basic pay it was INR 2,885. The actuary's valuation should already reflect the higher base for all eight years.

**Scenario 2. Fixed term contracts of different lengths.** A subsidiary hires data analysts on fixed term contracts, each with Code wages of INR 70,000 a month. One year of gratuity is INR 70,000 × 15 ÷ 26 = INR 40,385.

| Contract length | Usual rounding rule | Exact months pro rata | We pay |
|---|---|---|---|
| 11 months | Nil; under one year (Additional FAQ 19) | Nil | Nil |
| 14 months | 1 year: INR 40,385 | 14 ÷ 12 years: INR 47,115 | INR 47,115 |
| 18 months | 1 year (six months is not over six): INR 40,385 | 1.5 years: INR 60,577 | INR 60,577 |
| 20 months | 2 years: INR 80,769 | 20 ÷ 12 years: INR 67,308 | INR 80,769 |

Neither method is always higher. Exact months pays more for short part years, and rounding pays more once the part year passes six months. Paying the higher of the two avoids a claim either way. The old law gave all four analysts nothing.

**Scenario 3. Death in service.** An office manager with Code wages of INR 50,000 a month dies after 3 years and 4 months of service. The five year condition does not apply on death (FAQ 11).

FAQ 12 says gratuity for a deceased employee is paid pro rata. Exact months give INR 50,000 × 15 ÷ 26 × 40 ÷ 12 = INR 96,154. The rounding rule gives 3 years, or INR 86,538. We pay INR 96,154 to the nominee within 30 days. If the nominee is a minor, the share goes to the competent authority.

## Common mistakes

1. **Pricing gratuity on basic pay.** Gratuity uses Code wages from 21 Nov 2025. Fix: compute Code wages under section 2(88) for every employee and rerun the valuation.
2. **Using old wages for past years.** Additional FAQ 17 bases gratuity on last drawn wages at exit. Fix: price all years on those wages and agree the past service cost with your auditor for the year that includes 21 Nov 2025.
3. **Treating fixed term staff as outside gratuity.** They qualify after one year under the contract. Fix: diary each anniversary and accrue from the first day.
4. **Breaking contracts into 11 month pieces.** Back to back renewals look like an artificial break. Fix: count service from the first contract.
5. **Waiting for the employee's application.** The 1972 Act required the employer to determine and notify the amount itself, and we follow the same practice under section 56. Fix: issue the notice with the final settlement.
6. **Paying gratuity late for an exit checklist.** The 30 day clock runs from the exit date. Fix: pay the undisputed amount and recover dues separately.
7. **Forfeiting gratuity on resignation.** Forfeiture needs a ground that the Code names. Fix: pay in full unless the termination order states such a ground.
8. **Leaving the group gratuity policy on basic pay.** The insurer's fund may fall short. Fix: ask the insurer to revalue on Code wages.
9. **Paying a minor's share to a guardian.** FAQ 11 requires deposit with the competent authority. Fix: pay a minor's share only through the competent authority.

## Checklist

1. Confirm that Chapter V applies, with 10 or more employees on any day in the preceding 12 months.
2. Compute Code wages for each employee under section 2(88), with employer PF inside the 50 percent test.
3. Price the gap between the ministry reading and the text reading for fixed special allowances.
4. Commission an actuarial valuation on Code wages for every year of service.
5. Agree the past service cost with your auditor for the year that includes 21 Nov 2025.
6. Rewrite fixed term contracts with pay parity and the one year gratuity clause.
7. Record the start date of each fixed term employee's first contract.
8. Collect nominations from every employee who completes one year of service.
9. Issue a written determination notice on each exit.
10. Pay gratuity within 30 days of the exit date, and final wages within two working days.
11. Ask the group gratuity insurer to revalue the fund on Code wages.
12. Update the intercompany budget and mark up for the higher cost base.
13. Add exits and gratuity dates to your [2026-27 compliance calendar](/insights/compliance-calendar-foreign-owned-company-india-2026-27).

For the wider labour code changes, see our overview of the [new labour codes for foreign owned companies](/insights/new-labour-codes-foreign-owned-companies-india).

## Key terms

- **Gratuity**: Payment to an employee for service, governed by section 53 of the Code on Social Security, 2020. It is 15 days' wages for each completed year, with a part year over six months counted as a year. The payout cap is INR 20,00,000, and the employer must pay within 30 days. (https://krystal7.com/glossary#gratuity)
- **Fixed term employment**: Engagement on a written contract for a fixed period, defined in section 2(o) of the Industrial Relations Code, 2020 and section 2(34) of the Code on Social Security, 2020. Pay and benefits must match a permanent comparator. Section 2(o) makes a fixed term worker eligible for gratuity after one year of service under the contract. (https://krystal7.com/glossary#fixed-term-employment)
- **Continuous service**: The service length that counts for gratuity under the Code on Social Security, 2020. A completed year of service means continuous service for twelve months under section 2(17), and section 54 deals with what counts as continuous service. (https://krystal7.com/glossary#continuous-service)
- **Gratuity nomination**: A written direction by an employee naming who is to receive gratuity if the employee dies. Section 55 of the Code on Social Security, 2020 requires an employee who has completed one year of service to nominate, in the manner the appropriate Government prescribes. (https://krystal7.com/glossary#gratuity-nomination)
- **Forfeiture of gratuity**: The withholding of gratuity, wholly or in part, because employment ended for misconduct that the law names. Chapter V of the Code on Social Security, 2020 governs it, as the Payment of Gratuity Act, 1972 did before. Read the Code's own list of grounds before withholding any amount. (https://krystal7.com/glossary#forfeiture-of-gratuity)
- **Past service cost**: The accounting charge that arises when a change in law or plan terms raises the value of benefits already earned. Under AS 15 or Ind AS 19, a subsidiary may book it when gratuity moves to the new Code wage base. (https://krystal7.com/glossary#past-service-cost)

## Frequently Asked Questions

### Is gratuity payable after one year of service under the new labour code?

Only to a fixed term employee. Section 2(o) of the Industrial Relations Code, 2020 gives gratuity after one year of service under the contract. A permanent employee still needs five years of continuous service under section 53 of the Code on Social Security, except on death or disablement.

### Does an 11 month fixed term contract qualify for gratuity?

No, on the ministry's reading. Additional FAQ 19 of 16 Mar 2026 asks this question and requires one year of service under the contract, so 11 months falls short. Additional FAQ 14 counts the year from the start of the contract. If the contract is renewed without a break, we count service from the first contract.

### How is gratuity calculated under the Code on Social Security?

Section 53 gives 15 days' wages for each completed year of service, or part year over six months, on last drawn wages (FAQ 12). We compute 15 days' wages for a monthly paid employee as monthly Code wages × 15 ÷ 26. Multiply by the years of service, and cap the result at the notified ceiling.

### Which wages are used for gratuity from 21 Nov 2025?

Code wages under section 2(88) of the Code on Social Security, 2020. They include basic pay, DA and retaining allowance, plus excluded allowances above half of total remuneration. Additional FAQ 6 of 16 Mar 2026 applies this definition to gratuity from 21 Nov 2025. ESOPs, variable pay and reimbursements stay out.

### Is gratuity for service before 21 Nov 2025 paid on the old wages?

We price it on the new wages if gratuity becomes payable on or after 21 Nov 2025. Additional FAQ 17 says the employee is paid on wages last drawn at exit, under the Code on Social Security. The ministry does not say in terms how earlier years are treated, so we apply the new wages to all completed years.

### What is the maximum gratuity amount in 2026?

INR 20,00,000. The ministry's FAQ 12 of 30 Dec 2025 says the maximum is the amount the Central Government notifies, "currently ₹ 20 lakhs". Check the Gazette for any newer figure. An employer can pay more under a contract or agreement, which FAQ 13 protects.

### How is gratuity calculated for a fixed term employee?

FAQ 12 of 30 Dec 2025 says fixed term employees are paid gratuity on a pro rata basis, at 15 days' Code wages a year. The FAQs do not define pro rata. We compute it on exact months and on the six month rounding rule, and pay the higher figure.

### Is gratuity payable on death before five years of service?

Yes. FAQ 11 of 30 Dec 2025 says five years of continuous service is not needed on death or disablement. Gratuity goes to the nominee or the legal heirs. FAQ 12 says a deceased employee's gratuity is paid pro rata. A minor's share is deposited with the competent authority.

### When must an employer pay gratuity?

Within 30 days of the date it becomes payable, under section 56 of the Code on Social Security, 2020. We determine the amount and notify the employee on exit, without waiting for an application. The 1972 Act charged simple interest on late payment, so check section 56 and the Social Security (Central) Rules, 2026 for the interest that applies now.

### Can an employer forfeit gratuity for misconduct?

Only on a ground the Code names, and only after the employment is terminated for it. Read the forfeiture provision of Chapter V in the Gazette text first. The 1972 Act allowed forfeiture for damage to property, up to the loss, and for riotous conduct, violence or an offence involving moral turpitude at work. We treat resignation alone as no ground.

### Who must make a gratuity nomination?

Every employee who has completed one year of service, under section 55 of the Code on Social Security, 2020. The nomination goes to the employer. Where the employee has a family, as defined in section 2(33), we ask for family members to be nominated.

### Do contract workers supplied by an agency get gratuity from the principal employer?

The ministry says the contractor pays. Additional FAQ 16 says the contractor, as employer, pays gratuity after five years of continuous service at 15 days' wages a year. Additional FAQ 10 confirms that fixed term employment covers only employees the employer engages directly, so agency staff cannot use the one year rule.

### Does a gratuity insurance policy satisfy the Code?

It funds the liability but does not cap it. The employer still owes the full amount under section 53. If a group gratuity policy priced on basic pay pays less than Code wages require, the employer pays the difference. Check section 57, headed "Compulsory insurance", and any notification under it for your establishment.

### Does gratuity apply to a subsidiary with fewer than 10 employees?

Not until it reaches 10, unless the appropriate government notifies it. Chapter V applies to shops and establishments that employ, or employed on any day of the preceding 12 months, 10 or more employees. Under section 1(8) of the Code on Social Security, coverage continues even if headcount later falls below 10.

### Is gratuity taxable for employees in India?

Gratuity is exempt from income tax up to a limit and taxed as salary above it. Under section 10(10)(ii) of the Income Tax Act, 1961, the limit is INR 20,00,000 for employees covered by the Payment of Gratuity Act, 1972. Section 10(10)(iii) sets INR 10,00,000 for others. Check the matching provision of the Income Tax Act, 2025 before computing tax on gratuity paid from 1 Apr 2026.

## Sources

- Ministry of Labour and Employment, The Code on Social Security, 2020 (Act 36 of 2020), https://www.labour.gov.in/static/uploads/2025/07/b0620548445580767b5c0d18c95c26f7.pdf
- Ministry of Labour and Employment, The Industrial Relations Code, 2020 (Act 35 of 2020), https://www.labour.gov.in/static/uploads/2025/07/682a44b5426bff2c1f4943ee1b2fd566.pdf
- Ministry of Labour and Employment, The Code on Wages, 2019 (Act 29 of 2019), https://www.labour.gov.in/static/uploads/2025/06/c328da14bbb15fc4ad571dc33e7a4ab3.pdf
- Ministry of Labour and Employment, FAQs on Labour Codes, 30 Dec 2025, https://www.labour.gov.in/static/uploads/2026/01/de4758d5bfeffc456d7de97a801891b0.pdf
- Ministry of Labour and Employment, Additional FAQs on Labour Codes (as on 16 Mar 2026), https://www.labour.gov.in/static/uploads/2026/03/a4ccf4c6d97c4f1f36a6d83f8c64213d.pdf
- Ministry of Labour and Employment, Compliance Handbook for Employers under the Four Labour Codes (Central Government Sphere), February 2026, https://www.labour.gov.in/static/uploads/2026/02/83978455025732b99b0165def80ab171.pdf
- Gazette of India, Social Security (Central) Rules, 2026, G.S.R. 344(E), 8 May 2026, https://www.labour.gov.in/static/uploads/2026/05/49aa9b62c2125499c37399b90e969d67.pdf
- Press Information Bureau, Code on Social Security, 2020: Towards Universal and Inclusive Social Protection (factsheet), 22 Nov 2025, https://www.pib.gov.in/FactsheetDetails.aspx?Id=150473
- Press Information Bureau, Government Makes the Four Labour Codes effective to Simplify and Streamline Labour Laws, 21 Nov 2025, https://www.pib.gov.in/PressReleasePage.aspx?PRID=2192463
- Press Information Bureau, EPFO Raises Wage Ceiling from Rs. 15,000 to Rs. 25,000 (S.O. 5109(E)), 23 Sep 2026, https://www.pib.gov.in/PressReleasePage.aspx?PRID=2313829
- Income Tax Department, Tax free incomes (section 10(10), Income Tax Act, 1961), https://www.incometaxindia.gov.in/w/tax-free-incomes
- India Code, The Code on Social Security, 2020 (arrangement of sections for Chapter V), https://www.indiacode.nic.in/bitstream/123456789/16823/1/aA2020-36.pdf

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