1. Introduction

Gratuity is one of the most essential long-term financial benefits for employees in India, acting as a reward for service and a cushion for life after employment. Under the Social Security Code, 2020, gratuity is included under Chapter 5 (Sections 53–76), where it is modernized and aligned with the new wage definition, making the system more transparent and equitable.

Before the Code, gratuity was governed by the Payment of Gratuity Act, 1972. While the old law protected millions of workers, it suffered from inconsistent interpretations of “wage,” uncertainty around fixed-term employees, procedural delays, and limited digital compliance. The Social Security Code addresses these gaps and brings gratuity into a framework that is consistent with other social security benefits like PF, ESI, and compensation.

Hindi insight:

ग्रेच्युटी सेवा के प्रति आभार है—एक ऐसा वित्तीय लाभ जो कर्मचारी को उसके सेवाकाल के आधार पर मिलता है। नए कोड ने इसे आधुनिक और अधिक स्पष्ट बना दिया है।

2. What Is Gratuity and Why Is It Important?

Gratuity is a statutory benefit paid by an employer to an employee as a token of appreciation for continuous service. It becomes especially significant at retirement, resignation, termination, disablement, or death. For many workers, gratuity forms a substantial part of their post-employment financial support.

In India, gratuity is not optional—once eligibility criteria are met, it becomes a legally enforceable right. The Social Security Code further strengthens this right by clarifying calculation rules, tightening timelines, and broadening coverage to categories such as fixed-term employees and certain trainees.

Gratuity also promotes employee loyalty, stability, and long-term association with organizations. For employers, it becomes a predictable component of financial planning.

3. Eligibility for Gratuity (Section 56)

Under the Social Security Code, an employee becomes eligible for gratuity upon completing five years of continuous service. Continuous service includes:

• Actual working days
• Approved leave
• Layoff
• Absence due to temporary disablement
• Maternity leave for women employees (up to 26 weeks)

However, there are two major exceptions where five years of service is not required:

1. In the event of death or disablement

Gratuity becomes payable immediately, regardless of service length.

2. Fixed-term employees

They become eligible for proportionate gratuity even if they have worked less than five years.

This is a major reform and one of the most employee-friendly provisions in the Code.

Hindi note:

अब fixed-term कर्मचारियों को पाँच वर्ष पूरे किए बिना भी gratuity का अधिकार होगा—यह बड़ा बदलाव है।

4. Gratuity for Fixed-Term Employees (Section 53–54)

(One of the biggest reforms)

Earlier, fixed-term employees—those hired for short durations like 6 months, 1 year, or project-based contracts—were excluded from gratuity unless they completed five years. This created inequality, especially in industries like IT, manufacturing, media, hospitality, and education, where fixed-term employment is common.

The Social Security Code fixes this by explicitly stating that:

➤ Fixed-term employees are eligible for gratuity on a pro-rata basis.

This means even if someone works:

• 3 months
• 6 months
• 1 year
• 18 months

…they still earn gratuity proportionate to their period of service.

This single provision dramatically improves financial protection for millions of contractual and project-based workers.

5. Calculation of Gratuity (Section 57)

Gratuity is calculated as:

15 days of wages × (Number of years of continuous service)

Where “wage” now follows the standardized definition:

Basic + DA must be at least 50% of total monthly wages.

This means that gratuity payouts become more uniform, fair, and reflective of actual employee earnings.

How the 15-day formula works:

Monthly wage is divided by 26 (representing working days), giving the daily wage.

Daily wage × 15 × number of years of service = gratuity amount.

Example

If an employee earns ₹40,000 per month:

• Basic + DA (minimum 50%) = ₹20,000
• Daily wage = 20,000 ÷ 26 ≈ ₹769
• Gratuity per year = 769 × 15 = ₹11,535

If the employee served 10 years:

Total gratuity = ₹11,535 × 10 = ₹1,15,350

Under old salary structures with artificially low basic, gratuity would have been much lower.

Hindi explanation:

क्योंकि अब basic वेतन 50% से कम नहीं हो सकता, इसलिए gratuity की राशि पहले से अधिक होगी।

6. Gratuity in Case of Death or Disability (Section 58)

The Social Security Code ensures that families are financially protected in tragic events. Gratuity becomes payable immediately, without requiring five years of service.

If the employee passes away, gratuity is paid to:

• Nominee (if mentioned), or
• Legal heirs (if no nomination exists)

This provision ensures that families have a financial cushion during difficult times.

7. Payment Timelines and Employer Obligations (Section 59)

The employer must:

1. Determine gratuity payable within 30 days
2. Notify the employee or nominee
3. Pay the gratuity amount within 30 days

If the employer delays payment beyond 30 days:

➤ Statutory interest becomes mandatory

Interest is payable from the due date until the actual payment, unless the delay was caused by the employee.

Hindi note:

30 दिन से अधिक देरी होने पर employer को अनिवार्य रूप से ब्याज देना होगा—भले ही देरी उसकी गलती से हुई हो।

This strict timeline ensures accountability and reduces disputes.

8. Forfeiture of Gratuity (Section 76)

The Social Security Code retains earlier forfeiture provisions with clarity:

Gratuity can be forfeited:

• if the employee commits an act of wilful misconduct causing property damage, or
• is terminated for violence, moral turpitude, or riotous/disorderly conduct.

However, forfeiture must be proportionate and based on actual damage or proven misconduct. Employers cannot arbitrarily deny gratuity.

Courts in India are generally pro-employee on this issue, emphasizing caution in forfeiture decisions.

9. The Impact of the New Wage Definition on Gratuity

The wage definition reform has a profound impact on gratuity:

Higher basic pay → higher gratuity

Since gratuity is tied to wages, and wages must be at least 50% of total CTC, employees receive stronger long-term benefits.

Reduced salary manipulation

Earlier, low basic meant lower gratuity. The Code stops this.

Improved fairness

Compensation is now based on actual earning capacity, not an artificially crafted structure.

This reform especially benefits employees in IT, retail, construction, healthcare, and startup sectors.

10. Dispute Resolution (Section 61)

If there is a dispute regarding:

• Amount of gratuity
• Eligibility
• Nomination
• Timelines

The matter can be referred to the controlling authority under the Code. The decision is binding and enforceable.

Employees can also escalate to appellate bodies or approach courts if dissatisfied.

11. FAQ — With Relevant Chapter/Section Links

FAQ 1: Do fixed-term employees get gratuity?

Yes, they get proportional gratuity regardless of tenure.

(Relevant: Sections 53–54)

FAQ 2: Is 5 years of service mandatory?

Only for regular cases. Not required for death or disablement.

(Relevant: Section 56)

FAQ 3: Can gratuity be withheld?

Only for proven misconduct involving damage or violence.

(Relevant: Section 76)

FAQ 4: How soon must gratuity be paid?

Within 30 days of becoming payable.

(Relevant: Section 59)

FAQ 5: What happens if employer delays payment?

Mandatory statutory interest becomes payable.

(Relevant: Section 59)

12. Conclusion

Gratuity under the Social Security Code, 2020 has evolved into a more modern, fair, and employee-friendly system. By introducing standardized wage definitions, including fixed-term employees, tightening timelines, and ensuring compulsory interest for delayed payments, the Code strengthens financial security for millions of workers.

For employees, this means better long-term benefits.

For employers, it means clearer rules, reduced disputes, and predictable compliance obligations.

Gratuity is no longer just a token of appreciation—it is a legally protected right embedded in a unified social security framework designed for India’s evolving workforce.