Gratuity Payout Timelines & Penalties Under New Law

For decades, the "Full and Final" (F&F) settlement process in India was a waiting game. Employees would resign, serve their notice, and then wait, sometimes 30, 60, or even 90 days, for their final dues to hit their bank accounts. Companies used this time to process clearances, recover assets, and manage their own cash flow.

That flexibility effectively ended on November 21, 2025.

With the implementation of the Code on Wages, 2019 and the Code on Social Security, 2020, the clock has started ticking much faster for employers. The government has sent a clear message: Delayed wages are denied wages.

In this final guide, we will break down the new "2-Day Rule," clarify the specific timeline for gratuity payouts, and outline the severe penalties waiting for companies that fail to comply.

The New Speed Limit: "Two Working Days" for Wages

The most disruptive change for HR and Payroll departments comes from Section 17(2) of the Code on Wages, 2019.

It states that whenever an employee leaves employment, whether by resignation, dismissal, retrenchment, or removal, the wages payable to them must be paid within two working days of their exit (1).

Does "Wages" Include Gratuity?

This is the most critical distinction.

• Wages (Salary, Leave Encashment, etc.): MUST be paid within 2 working days.
• Gratuity: Technically, gratuity is governed by the Code on Social Security, which mandates payment within 30 days of it becoming payable.

However, here is the trap: Most employees (and legal authorities) view the "Full and Final Settlement" as a single event. If you pay the salary in 2 days but hold back the gratuity for a month, you invite friction, complaints, and scrutiny. Leading companies are now racing to align their Gratuity payout rules 2026 with the 2-day wage cycle to ensure a clean, litigate-free exit (2).

The Gratuity Deadline: 30 Days or Else

While the "2-day rule" applies to wages, the statutory deadline for gratuity remains strict. Under the Code on Social Security, 2020, an employer has a maximum of 30 days from the date of the employee's exit to deposit the gratuity amount into their account. If you miss this 30-day window, the consequences are automatic and expensive.

1. Mandatory Interest Penalties
   If the gratuity is not paid within 30 days, the employer must pay simple interest on the amount for the duration of the delay (3).

• The Rate: Typically notified by the Central Government (currently pegged around 10% per annum or the long-term deposit rate).
• No Excuses: You cannot argue "bad cash flow" or "clerical error." The interest penalty is statutory and mandatory.
  
  

2. Legal Penalties & Imprisonment
   The new codes have decriminalized some minor procedural lapses, but non-payment of employee dues remains a serious offense.

• Fine: Penalties can range from ₹50,000 to ₹1,00,000 for subsequent offenses.
• Imprisonment: In cases of willful non-payment or repeated violation, employers can face imprisonment for up to one year (4).

Why the Old "Pay-Later" Model is Dangerous

In the past, many companies treated gratuity as a "last priority" payment. They would use their operating cash flow to pay salaries first, vendors second, and ex-employees last.

The "Liquidity Crunch" Scenario: Imagine 5 senior managers resign in March 2026 (post-appraisal).

• Combined Gratuity Liability: ₹1.5 Crores (inflated by the 50% wage rule).
• Timeline: You have 30 days to pay this.
• The Risk: If your working capital is tied up in inventory or pending invoices, you might default. Defaulting triggers interest penalties (10%) and opens the door for these senior ex-employees to file a complaint with the Labour Commissioner.

Under the new regime, the Labour authorities have digitized grievance redressal. An employee can file a complaint online, triggering an automatic notice to the employer. The "hide and wait" strategy no longer works.

The Solution: Automated Liquidity with ABSLI

The only way to ensure you can meet the Gratuity payout timelines, whether it is the aggressive 2-day target for best practice or the 30-day statutory limit, is to have a funded corpus ready.

ABSLI’s Group Gratuity Plans solve the liquidity problem instantly:

1. Claim Settlement Speed: When an employee resigns, you simply lodge a claim with ABSLI. We process the payment from your accumulated fund.
   
   

2. No Cash Flow Impact: The money doesn't come from your monthly operating account; it comes from the trust fund you have built over time.
   
   

3. Automatic Compliance: Since the funds are available, you never miss the deadline. You never pay interest penalties. You never face legal notices.

Conclusion: Compliance is a Competitive Advantage

The implementation of the new labour codes in late 2025 was not just a regulatory update; it was a shift in the power dynamic. The law now firmly sides with the employee regarding timely payments.

For employers, the Gratuity Payout Timelines & Penalties Under New Law are a clear warning: Digitize, Fund, and Pay on Time.

Struggling to meet the 2-day wage deadline or the 30-day gratuity limit is not just an operational failure; it is a legal risk. By partnering with Aditya Birla Sun Life Insurance (ABSLI), you turn this risk into a routine process. We ensure your funds are ready so your employees leave with a smile, not a lawsuit.

Don't wait for a notice to arrive. Secure your gratuity compliance with ABSLI today.