Gratuity Under the New Labour Codes: The 50% Wage Rule, Fixed-Term Staff, and What It Does to the Books

For more than half a century, gratuity in India was a sum you could do on the back of an envelope. Take the last basic pay and dearness allowance. Divide by twenty-six, multiply by fifteen, multiply by the years. The answer was what a retiring employee was owed, and the balance sheet held a provision that an actuary worked out from much the same arithmetic.

On 21 November 2025, the envelope changed. The Code on Social Security, 2020 came into force that day, and the Payment of Gratuity Act, 1972 was repealed with it. The fifteen days and the twenty-six stayed. What counts as wages did not, and nor did who qualifies. For many employers both changes point the same way, and the books have to show it.

What changed on 21 November 2025

The Central Government's notification S.O. 5319(E) brought most of the Code into force on 21 November 2025, including Chapter V on gratuity. The Payment of Gratuity Act is one of the laws that section 164 repeals from that date. The Social Security (Central) Rules, 2026 followed on 8 May 2026 and replaced the gratuity rules of 1972.

Three things matter for the books:

• Wages are defined afresh, and a pay structure built on a low basic can no longer keep them low.
• Fixed term employees qualify after one year, not five.
• Past service is paid at the new wage. The Ministry of Labour's FAQs of 16 March 2026 say that gratuity for service before 21 November 2025 is paid on the wages last drawn on or after that date, as the Code defines them.

The 50% rule, in one example

Section 2(88) defines wages as all remuneration, including basic pay, dearness allowance and retaining allowance, and then lists what is left out: bonus, the value of housing and amenities, the employer's contribution to provident fund or pension, conveyance, special expenses, house rent allowance, overtime, commission, and a few more.

The first proviso is the part that bites. If the excluded items in clauses (a) to (i) come to more than one-half of all remuneration, the amount above one-half is treated as wages anyway.

Take an employee on ₹50,000 a month: ₹20,000 of basic and DA, and ₹30,000 of HRA, conveyance and other excluded allowances. Under the old Act, gratuity was worked out on ₹20,000. Under the Code, one-half of pay is ₹25,000. The excluded items are ₹5,000 above that, so wages become ₹25,000.

Eight years of service then moves gratuity from ₹92,308 to ₹1,15,385, an increase of a quarter for the same person with the same pay, and none of that change is in the salary slip.

One more point from the text. The list of exclusions is closed. On the plain words of section 2(88), an allowance that is not on it, a "special allowance" for instance, is not excluded at all, and is wages from the start.

Who qualifies now

• Five years of continuous service is still the rule under section 53(1). A working journalist needs three.
• No minimum at all on death or disablement.
• A fixed term employee qualifies after one year of service under the contract, under section 2(o) of the Industrial Relations Code and rule 33 of the 2026 Rules, and is paid pro rata.
• Fifteen days' wages for each completed year, and for a part year of more than six months, on the wages last drawn. For a monthly rated employee that is the monthly wage divided by twenty-six and multiplied by fifteen. A seasonal establishment pays seven days' wages for each season.
• The ceiling is whatever the Government notifies. The Code prints no figure in section 53(3). The Ministry of Labour's FAQs of 30 December 2025 say it is currently ₹20 lakh.
• Who must pay: every factory, mine, oilfield, plantation, port and railway company, and every shop or establishment with ten or more employees on any day of the preceding twelve months.

What the books have to say

ICAI's Accounting Standards Board answered this directly in its FAQs of 26 December 2025. The answers are short and firm.

• It is a plan amendment. The change in gratuity from the new Codes is treated as past service cost under AS 15 and Ind AS 19.
• Under Ind AS it goes through profit or loss at once. Ind AS 19 recognises past service cost as an expense immediately.
• Under AS 15 it depends on vesting. Past service cost for benefits already vested is recognised immediately. For employees yet to complete the service period, it is spread over the period until the benefits vest.
• Leave is different. Any change in the leave obligation is recognised immediately, under both frameworks.
• The quarter it lands in is the one ended 31 December 2025. For periods ending before 21 November 2025, it is a non-adjusting event, disclosed rather than booked.
• "Exceptional" is a judgement, not a label. An entity may evaluate whether the expense meets the tests of materiality and incidence for presentation as an exceptional item, and has to disclose it either way.

Listed companies did exactly this. Sagility Limited, in its results for the quarter ended 31 December 2025, showed ₹328.23 million as an exceptional item titled "Impact of new Labour Codes", explaining that the one-time impact related primarily to provisions for gratuity and compensated absences.

For a company with a March year end, the change first reached the annual accounts for 2025-26. The year running now, 2026-27, is the first to sit wholly under the Code.

And the tax return

The Income-tax Act, 2025 keeps the old rule in new numbers. Under section 29, a contribution to an approved gratuity fund is deductible, and so is a provision for a contribution to the fund or for gratuity that has become payable during the year. A provision for gratuity to be paid on some future retirement is not deductible. ICAI's FAQ draws the consequence: an unfunded plan is deducted only in the year the gratuity becomes payable, and the timing difference gives rise to a deferred tax asset, subject to prudence.

There is one loose end in the text. The exemption for an employee's gratuity in section 19 of the 2025 Act, even as amended by the Finance Act, 2026, still describes it as gratuity received under the Payment of Gratuity Act, 1972, the Act that the Code repealed. Until that entry catches up, how the exemption reads for gratuity paid under the Code is worth checking, not assuming.

Five questions for the next valuation

• Does the actuary's data use wages as section 2(88) defines them, including the add-back above one-half, or still basic and DA?
• Are fixed term employees in the valuation from their first year?
• Has the increase for service before 21 November 2025 been booked as past service cost, with the AS 15 vesting split where it applies?
• If salaries were restructured to meet the 50% rule, has that been treated as a plan amendment and not as an actuarial assumption? ICAI's FAQ says the two are different.
• Is the provision matched against section 29 in the tax computation, with deferred tax on the difference?

Where this comes from

The law is quoted from the Code on Social Security, 2020 as published in the Gazette (sections 2(88), 53, 54 and 164, and the First Schedule), notification S.O. 5319(E) of 21 November 2025, the Industrial Relations Code, 2020, section 2(o), and the Social Security (Central) Rules, 2026, rule 33. The ceiling and the treatment of past service are from the Ministry of Labour and Employment's FAQs of 30 December 2025 and 16 March 2026. The accounting is from ICAI's Accounting Standards Board FAQs of 26 December 2025, and the tax position from the Income-tax Act, 2025 as amended by the Finance Act, 2026. The example is arithmetic on the definition, not a valuation. A real liability is the present value of the benefit across the whole workforce, and only an actuary can put a number on that.