Impact on Employers: Increased Gratuity Liability After Nov 2025

The financial landscape for Indian businesses shifted overnight on November 21, 2025. When the new labour codes became legally effective, they didn't just rewrite the rules for employees; they fundamentally altered the balance sheets of every company in the country.

For years, Chief Financial Officers (CFOs) and HR Heads have operated on a predictable model. Gratuity was a distant liability, triggered only when a permanent employee left after five long years. It was manageable. It was predictable.

That predictability is gone.

The New Gratuity Rules 2025 / 2026 have introduced a "double shock" to employer liabilities: a wider net of eligible employees and a significantly higher base for calculation. If your organization is still treating gratuity as a "pay-as-you-go" expense, you might be sitting on a ticking financial time bomb.

In this comprehensive guide, we will break down the Impact on employers & payouts, analyze the actuarial surge in your liabilities, and explain why a funded Group Gratuity Plan with ABSLI is no longer just an "option", it is a business necessity.

The "Double Whammy": Why Your Liability Just Spiked

To understand the urgency, we must look at the two specific changes that are driving up costs. It is not just one rule; it is the interaction between two of them that creates the multiplier effect on your expenses.

1. The Volume Shock: Gratuity Eligibility After 1 Year

Historically, attrition before five years was "free" for employers regarding gratuity. If an employee left in Year 3 or Year 4, the company paid zero gratuity.

Under the new rules, this "cost-saving" window has vanished for a large segment of the workforce.

• The Change: Fixed-Term Employees (FTEs) are now eligible for gratuity after just one year of service ⁽¹⁾.
• The Impact: In sectors like IT, Retail, and Logistics, where contract churn is high, companies often see tenure averages of 18–24 months. Previously, this cost nothing in gratuity. Now, every single one of those exits triggers a payout.
• The Result: You are paying gratuity to a significantly larger volume of people than ever before.
  
  

2. The Value Shock: 50% Wage Rule Gratuity

This is the more silent, yet more expensive, killer of margins. The new definition of "Wages" under the Code on Wages, Basic 2019, mandates that the Pay + DA + Retaining Allowance must constitute at least 50% of the total CTC ⁽²⁾.

• The Old Way: Companies structured salaries with 30-35% Basic and 65-70% Allowances (HRA, Conveyance, Special Allowance) to minimize PF and Gratuity burdens.
• The New Way: You are legally forced to restructure. If allowances exceed 50%, the excess is added back to "Wages" for calculation purposes.
• The Result: The "base" on which you apply the 15/26 formula has likely jumped by 40-50% for many employees.

When you multiply a larger number of people (due to 1-year eligibility) by a higher payout amount per person (due to the 50% rule), the total liability doesn't just grow linearly, it grows exponentially.

The Actuarial Nightmare: A Practical Case Study

Let’s move away from theory and look at the numbers. Consider a mid-sized IT Services company, "TechSol India," with 500 employees.

The "TechSol" Scenario:

• Workforce: 500 Employees
• Composition: 300 Permanent, 200 Fixed-Term Contracts (2 Years)
• Average CTC: ₹6,00,000 per annum
• Attrition: 20% (Common in IT)
  

Before Nov 2025 (Old Rules)

• Salary Structure: Basic was 30% of CTC (₹1,80,000).
• FTE Liability: Zero (because they leave after 2 years, missing the 5-year cutoff).
• Permanent Liability: Calculated on ₹1.8 Lakh base.
• Total Annual Outflow: Minimal, mostly for long-serving retirees.
  

After Nov 2025 (New Rules)

• Salary Structure: Basic must be 50% of CTC (₹3,00,000). (66% increase in base)
• FTE Liability: Now, all 200 contract employees are eligible.
• Permanent Liability: Calculated on ₹3.0 Lakh base.
  

The Financial Hit:

1. For FTEs: If 50 contract employees leave this year after 2 years of service:

• Calculation: $(15/26) \times 25,000 (\text{Monthly Basic}) \times 2 \times 50 \text{ employees}$
• New Cost: ₹14,42,300 (Previously ₹0)
  
  

2. For Permanent Staff: Every payout for a retiring senior employee is now 66% higher because the base jumped from 30% to 50% of CTC.

The Liquidity Trap: Gratuity Payout Rules 2026

If the increased cost wasn't enough, the timeline for payment has also tightened, removing the "breathing room" companies used to have.

Under the new codes, the Gratuity payout rules 2026 mandate that Full and Final (F&F) settlements, including gratuity, must be processed within two working days of the employee's exit in many cases ⁽³⁾.

The Cash Flow Risk

Previously, companies would process F&F settlements in 30, 45, or even 60 days. This allowed them to manage cash flow, waiting for client payments to come in before paying outgoing employees.

• The New Reality: You have 48 hours.
• The Risk: If 10 senior employees resign in the same month (e.g., after appraisal cycles), and you are hit with the 50% wage rule gratuity impact, do you have the liquid cash today to pay them all within 2 days?⁽³⁾
  

Failing to pay on time invites:

1. Legal Penalties: Interest penalties on delayed payments.
   
2. Reputational Damage: In the age of social media, "delayed F&F" reviews on Glassdoor can destroy your employer brand.
   
3. Legal Action: Non-compliance with the Code on Wages is a serious offense.
   

The Gig Economy Levy: A New Line Item

For companies relying on gig workers, logistics, delivery, quick-commerce, there is a new statutory liability that is not strictly "gratuity" but functions similarly.

The Code on Social Security introduces a contribution of 1% to 2% of annual turnover (capped at 5% of amount paid to workers) to a Social Security Fund ⁽⁴⁾.

• Impact: This is a direct hit to the topline/bottom line. It is a "cess" on your revenue to fund the benefits for gig workers.
• Planning: This cannot be ignored. It must be budgeted for, just like GST or corporate tax.

Strategic Solution: Why "Pay-As-You-Go" is Dead

Historically, many Indian SMEs and even some large corporates used the "Pay-As-You-Go" method. They didn't set aside money; they just paid gratuity from the current month's profits when someone left.

Why this fails in 2026:

1. Unpredictability: With Gratuity eligibility after 1 year, exit volumes are higher and harder to predict.

2. Cash Flow Shocks: The "2-day rule" means you can't delay payments to manage cash flow.

3. Balance Sheet Volatility: A sudden spike in exits can wipe out a quarter's profit if the expense isn't provisioned for.

The Answer: ABSLI Group Gratuity Plans

The only sustainable way to manage this Impact on employers & payouts is to transition from "funding from pocket" to "funding via a trust." A Group Gratuity Plan allows you to build a dedicated corpus to meet these future liabilities.

1. Tax Efficiency (The CFO's Favorite)
   Contributions made to an approved Group Gratuity fund are treated as a Business Expense.

• Section 36⁽¹⁾(v) of the Income Tax Act: The money you put into an ABSLI Gratuity fund is tax-deductible in the year of payment.
• Benefit: You reduce your corporate tax liability today while saving for a future expense. It is a win-win.
  
  

2. Asset-Liability Management
   Instead of your cash sitting idle or being used for working capital, the funds in a Group Gratuity Plan are invested in debt and equity markets (based on your choice).

• The Gain: The fund earns interest. Over time, a significant portion of the gratuity payout is funded by the interest earned, not just your principal contribution. This effectively lowers the cost of the liability for the company.
  
  

3. Offloading Compliance
   Managing the calculations for hundreds of employees, tracking who completed 1 year, who crossed 5 years, whose Basic changed, and who needs to be paid in 48 hours, is an administrative nightmare.

• The ABSLI Advantage: We handle the actuarial valuations and payout processing. When an employee leaves, you trigger the claim, and the fund pays out. Your cash flow remains undisturbed.

Action Plan: Steps for HR and Finance Heads

To navigate the New Gratuity Rules 2025 / 2026 without disrupting your business, you need a roadmap.

Step 1: Immediate Actuarial Valuation

Do not guess. Hire an actuary to assess your liability under the new "50% Wages" and "1-Year Eligibility" rules. You will likely find your current provisions are woefully inadequate.

Step 2: Restructure Salary Components

Work with your legal and payroll teams to ensure your CTC structures comply with the wage code. Avoid the trap of "allowance heavy" salaries that will attract legal scrutiny and retrospective claims.

Step 3: Establish a Funded Trust

If you haven't already, set up a Gratuity Trust and link it to an ABSLI Group Gratuity Plan.

• Start funding the "past service liability" (the debt you owe for years already worked) in installments.
• Begin monthly or annual contributions for current service cost.
  
  

Step 4: Update Employment Contracts

Ensure your offer letters for Fixed-Term Employees clearly state the gratuity terms to avoid ambiguity. Transparency builds trust.

Conclusion: Turning Liability into Strategy

The Impact on employers & payouts post-November 2025 is undeniable. The costs have gone up. The timelines have shrunk. The compliance burden is heavier.

However, forward-thinking organizations are viewing this not just as a cost, but as an opportunity to secure their workforce and stabilize their finances. By moving to a funded gratuity model, you protect your company from cash flow shocks and offer your employees, both permanent and fixed-term, the security they deserve.

In a talent market that values stability, a well-funded gratuity program is a powerful employer branding tool.

Don't let the new laws catch your balance sheet off guard. Partner with ABSLI to manage your liability intelligently.