How does gratuity work under the new Labour Codes?

LiveRec EditorialUpdated

Gratuity under the new Labour Codes, set out in the Code on Social Security, 2020, is a payment for continuous service, calculated as 15 days' wages for each completed year. Regular employees generally need five years. Fixed-term employees are eligible after one year of service under their contract. The employer must pay within 30 days of it becoming payable.

At a glance

  • Applies from 21 November 2025, the date the Code came into force (Ministry FAQs).
  • Payable on superannuation, retirement, resignation, death or disablement, or expiry of a fixed-term contract.
  • Five years is not needed for death, disablement or expiry of a fixed-term contract.
  • The maximum is set by the Central Government; the Ministry states it is currently Rs 20 lakh.

Who is covered by gratuity under the new Labour Codes?

Every factory, mine, oilfield, plantation, port and railway company, and every shop or establishment with ten or more employees in any of the preceding twelve months, plus any others the government notifies.

The formula

For each completed year of service, or part of a year over six months, the employer pays 15 days' wages based on wages last drawn.

Illustration (our own numbers): wages of Rs 50,000 a month, six completed years. Using the 26-working-day month that applied under the 1972 Act, the figure is 50,000 / 26 x 15 x 6, about Rs 1,73,077. The Code's rules may fix the method, so confirm with your employer.

Special cases: piece-rated staff use the average of the last three months' wages excluding overtime; seasonal staff get 7 days' wages per season; fixed-term and deceased employees are paid pro rata.

Fixed-term employees

They qualify on completing one year under the contract (Ministry FAQs). The Ministry's FAQ says an 11-month contract does not meet the one-year requirement. See fixed-term employment.

Wage definition matters

The Ministry confirms the new wage definition applies to gratuity from 21 November 2025 (the 50% rule). For service before that date, gratuity is paid at the wages last drawn when the benefit becomes payable on or after 21 November 2025.

Nomination, payment and forfeiture

  • Employees with one year of service must make a nomination.
  • Payment is due within 30 days of becoming payable.
  • Gratuity can be forfeited to the extent of damage or loss to the employer's property caused by wilful acts or negligence leading to termination.
  • Better terms in an award, agreement or contract continue to apply.

Contract labour

The Ministry says the contractor, as employer, pays gratuity after five years of continuous service.

For a short definition, see gratuity.

Sources

This is general information, not legal, tax or immigration advice. Rules change and your situation may differ. Consult a licensed attorney or qualified adviser.