How new gratuity rules affect employers in 2026

India's new gratuity framework can increase both the number of eligible employees and the wage base used for calculations. Employers should review fixed-term contracts, payroll components, actuarial provisions, and payment controls. The changes apply under the labour codes effective from 21 November 2025, but their exact financial effect depends on workforce mix and salary structure.

What changed for employers after November 21, 2025?

The main employer impact comes from three connected changes: eligible fixed-term employees may receive gratuity sooner, the common statutory definition of wages can broaden the calculation base, and payment must be made within the prescribed period. Together, these changes can raise provisions, accelerate cash outflows, and require closer payroll governance.

The Code on Social Security, 2020 became effective on 21 November 2025. Gratuity remains an employer-funded statutory benefit. The Ministry of Labour's employer handbook states that it is generally paid at 15 days' wages for every completed year of service, subject to the notified ceiling and applicable conditions. This article addresses central-law principles.

State-specific implementation, establishment coverage, employment terms, and later notifications may affect a particular case. Employers should obtain legal, actuarial, accounting and tax advice before changing policy or provisioning.

Which employees can qualify after one year?

The shorter threshold applies to a fixed-term employee when the written contract expires after at least one year of service. It does not replace the general five-year continuous-service condition for every employee. Death, disablement, and other statutory exceptions can also make the five-year condition inapplicable. A fixed-term arrangement should be documented as such and should state the contract period clearly.

The Ministry's 2026 FAQ also addresses shorter contracts and early exits, so HR teams should not rely on the phrase 'one-year rule' alone. Review the form of engagement, the reason for separation, and the employee's actual service before deciding eligibility.

How does the new wage definition affect gratuity?

The wage definition can increase the gratuity base where excluded components form more than half of total remuneration. The excess over the 50% threshold is added back for statutory calculations. This is an inclusion test, not a blanket rule requiring every employer to set basic salary at exactly 50% of CTC. Payroll teams should map each salary component against the statutory inclusions and exclusions. Labels alone are not decisive.

If an amount is excluded but total exclusions exceed the permitted proportion, part of that amount may return to the wage base. Remuneration in kind can also be relevant within the limits and conditions stated by law.

How can the change raise an employer's liability?

Liability can rise in two ways. First, more fixed-term employees may become eligible when their contracts expire. Second, the last-drawn wage used in the formula may be higher after the statutory add-back. The combined effect should be measured employee by employee rather than estimated from a single CTC percentage.

Consider a hypothetical fixed-term employee whose monthly statutory wages at exit are ₹30,000 and whose eligible service is two completed years. Using the common monthly-rated illustration, gratuity would be approximately ₹34,615: ₹30,000 × 15 ÷ 26 × 2. This illustration excludes special cases, rounding practices, ceilings, and any more favourable employment terms.

For service that began before November 21, 2025, but ends on or after that date, the Ministry's March 2026 FAQ says gratuity is paid under the code using wages last drawn at the qualifying event. Employers should ask their actuary and legal advisers how that official clarification affects opening obligations, current-service cost, and financial reporting.

What is the payment timeline and cash-flow risk?

The Ministry's compliance handbook says an employer must pay gratuity within 30 days from the date it becomes payable. If payment is delayed, statutory interest may apply unless the conditions for an exception are met. A two-day or 48-hour deadline should not be presented as the gratuity rule. The practical risk is concentration.

Several resignations, retirements or fixed-term expiries in one period can create a larger cash requirement than the annual provision suggests. Finance and HR should maintain an employee-level eligibility register, forecast likely exit dates, and define who authorises calculation, notice, and payment.

What should employers do now?

A sound response starts with data, not salary restructuring. Employers should reconcile the employee master, contract type, joining date, wage components, prior service, and expected exit event. The resulting liability assessment should then feed payroll controls, accounting estimates, and treasury planning.

• Classify workers correctly, with special attention to written fixed-term contracts and contract-expiry dates.
• Map each remuneration component to the statutory definition of wages and test the 50% exclusion limit.
• Commission or refresh the actuarial valuation using current employee data and documented assumptions.
• Reconcile gratuity provisions with applicable accounting standards and obtain auditor input where required.
• Build a 30-day payment workflow covering calculation, employee or nominee communication, approval, and proof of payment.
• Update employment contracts and HR policies without reducing an employee's statutory or more favourable contractual rights.
• Review funding and liquidity arrangements against expected exits, while keeping investment, tax and Insurance decisions, subject to professional advice.

Should an employer fund the gratuity liability?

Funding may help an employer segregate assets and plan cash flow, but it does not remove the employer's legal responsibility. The appropriate structure depends on workforce demographics, liability size, governance, liquidity needs, approved-trust requirements, tax treatment, costs and the terms of any insurance arrangement.

An unfunded provision is an accounting recognition, not a pool of cash. A funded arrangement may support asset-liability planning, but investment values and income can vary unless a specific contractual guarantee applies. Employers should compare terms, charges, surrender, or termination conditions, service standards and claim processes before deciding.

How can ABSLI help?

ABSLI can provide information on available group gratuity solutions and their policy terms. Any decision should follow an actuarial assessment and a review of the applicable product documents, eligibility rules, charges, risks, tax considerations, and UIN. Benefits are payable only according to the issued policy and approved scheme rules.

Also read

• When must gratuity be paid under the new labour law?
• How is gratuity calculated?
• Gratuity rules for private-sector employees
• Latest amendments affecting gratuity
  
  

References

• Ministry of Labour and Employment, Code on Social Security, 2020, especially sections 2 and 53 to 56: https://www.labour.gov.in/static/uploads/2025/07/b0620548445580767b5c0d18c95c26f7.pdf
• Ministry of Labour and Employment, Compliance Handbook for Employers Under the Four Labour Codes, February 2026, pages 24 to 25: https://www.labour.gov.in/static/uploads/2026/02/83978455025732b99b0165def80ab171.pdf
• Ministry of Labour and Employment, FAQs on Labour Codes, January 2026: https://www.labour.gov.in/static/uploads/2026/01/de4758d5bfeffc456d7de97a801891b0.pdf
• Ministry of Labour and Employment, Additional FAQs on Labour Codes, 16 March 2026: https://www.labour.gov.in/static/uploads/2026/03/a4ccf4c6d97c4f1f36a6d83f8c64213d.pdf
• Ministry of Labour and Employment, Social Security (Central) Rules, 2026: https://www.labour.gov.in/static/uploads/2026/05/49aa9b62c2125499c37399b90e969d67.pdf