Gratuity is now payable under Section 53 of the Code on Social Security, 2020, not under the Payment of Gratuity Act, 1972, which was repealed by Section 164 of the Code when the four labour codes were brought into force on 21 November 2025. The familiar architecture survived. Five years of continuous service, fifteen days of wages for every completed year, a divisor of twenty six, the waiver on death or disablement and the forfeiture grounds all read across almost word for word. What moved is quieter and costs more: the definition of wages that feeds the calculation, the ceiling, which is now a notified figure rather than a number in the statute, and the position of fixed term employees, who no longer have to wait five years.
Part of the employment and labour law practice at S Jain & Attorneys, Bangalore.
Whether you are an employee working out what you are owed or an employer working out what to provide for, stop quoting the 1972 Act. Everything now runs on Sections 53 to 56 of the Code.
What changed and what did not
| Point | Under the Payment of Gratuity Act, 1972 | Under the Code on Social Security, 2020 |
|---|---|---|
| Qualifying service | Five years of continuous service | Five years, Section 53(1), unchanged |
| Rate | Fifteen days of wages for each completed year or part above six months | Fifteen days, or such number of days as the Central Government notifies, Section 53(2) |
| Divisor for a monthly rated employee | Monthly wages divided by twenty six, multiplied by fifteen | Same, Explanation 3 to Section 53 |
| Fixed term employees | No separate provision | Payable on expiry of the fixed term, on a pro rata basis, without five years |
| Ceiling | A notified amount since the 2018 amendment to Section 4(3) | A notified amount, Section 53(3) |
| Working journalists | Five years | Three years, first proviso to Section 53(1) |
| Payment deadline | Thirty days from the date it becomes payable | Thirty days, Section 56(3), unchanged |
The general picture of what the codes did to employment law is in our note on the four labour codes and what actually changed for employees, and the threshold question of whether you are a worker at all, which decides your forum in a termination fight, is in whether you are a worker under the Industrial Relations Code.
The five year rule and the ways round it
Section 53(1) makes gratuity payable to an employee on termination of employment after not less than five years of continuous service, on superannuation, on retirement or resignation, on death or disablement due to accident or disease, on termination of the contract period under fixed term employment, or on the happening of any event the Central Government notifies.
The second proviso then removes the five year requirement in three situations: death, disablement, and expiration of fixed term employment, together with any notified event. The first proviso separately reduces five years to three for a working journalist as defined in the Working Journalists and other Newspaper Employees (Conditions of Service) and Miscellaneous Provisions Act, 1955. The third proviso deals with death, directing payment to the nominee or, where there is no nomination, to the heirs, with a minor's share deposited with the competent authority for investment until majority.
Explanation 1 to Section 53 carves out a person holding a post under the Central or a State Government who is governed by another Act or by rules that provide for gratuity. Explanation 2 defines disablement as disablement that incapacitates an employee for the work he was capable of performing before the accident or disease.
Fixed term employment: the change that matters
This is the substantive gain. Under the 1972 Act a person on a series of one or two year contracts rarely reached five years with a single employer and rarely received gratuity. Section 53(1)(d) now makes gratuity payable on termination of the contract period under fixed term employment, the second proviso removes the five year requirement in that case, and the third proviso to Section 53(2) requires the employer to pay gratuity on a pro rata basis where the employee is on fixed term employment or has died.
The Ministry's position on the one year point
The statute does not itself state a minimum period for a fixed term employee. The Ministry of Labour and Employment has answered the question twice in its Additional FAQs on Labour Codes as on 16 March 2026. Asked whether gratuity is payable on completion of exactly one year or whether more is required, the Ministry replied that a fixed term employee will be eligible for gratuity if he or she renders service under the contract for a period of one year from the start of the contract. The same answer is given again in the Industrial Relations Code section of the same document, in the context of an eleven month contract.
Two qualifications matter. The FAQ carries its own disclaimer that it does not purport to be a legal document and that the Code prevails in case of any variance. And the Ministry has separately clarified that fixed term employment covers employees directly engaged by the employer, so a person supplied through a contractor is not a fixed term employee for this purpose; for contract labour, the contractor as employer pays gratuity on five years of continuous service.
If your appointment letter calls you a consultant or a retainer but your working reality is employment, the label will not decide the question. The drafting points that give the game away are set out in employment agreements in India.
How the amount is worked out
Section 53(2) requires the employer to pay, for every completed year of service or part in excess of six months, fifteen days of wages, or such number of days as the Central Government notifies, based on the rate of wages last drawn. Explanation 3 states the arithmetic for a monthly rated employee: divide the monthly rate of wages last drawn by twenty six and multiply by fifteen.
So the working formula is last drawn monthly wages, divided by twenty six, multiplied by fifteen, multiplied by the number of completed years, counting a part year above six months as a full year. Two provisos change the base in special cases: for a piece rated employee daily wages are the average of total wages for the three months preceding termination, excluding overtime, and for an employee in a seasonal establishment who is not employed throughout the year the rate is seven days of wages for each season.
A longer worked example, with the older figures and the arithmetic set out step by step, is in our earlier note on gratuity rules, eligibility and calculation in India. Read it with this one, because the formula there survives but the wage base beneath it has moved.
The quiet change: what counts as wages
The number that goes into the formula is not your cost to company and it is no longer whatever your payslip calls basic. Wages are defined in Section 2(88) of the Code on Social Security, 2020, with an included part and an excluded part, and the Code on Wages, 2019 carries the parallel definition with the proviso that caps excluded allowances at half of total remuneration.
The Ministry has confirmed the practical consequences. A payment that is not part of the components in Section 2(88) is not considered for gratuity. The revised definition applies for gratuity calculation with effect from 21 November 2025. Overtime allowance forms part of the components, and where such allowances exceed fifty per cent of remuneration the excess is added back to wages. Employer contributions to provident fund and pension and statutory bonus count towards the fifty per cent test, while gratuity, employees state insurance and other retirement benefits do not. Annual performance based incentives do not form part of wages under the codes.
The ceiling is a notified figure, not a number in the statute
Section 53(3) provides that the amount of gratuity payable to an employee shall not exceed such amount as may be notified by the Central Government. There is no figure in the Code. This is not new drafting: Act 12 of 2018 had already substituted the words "such amount as may be notified by the Central Government from time to time" for the words "ten lakh rupees" in Section 4(3) of the Payment of Gratuity Act, 1972 with effect from 28 March 2018. The number people quote from memory has been a notification, not a statute, for years.
The practical instruction follows. Do not take the ceiling from an article, an HR policy or a payroll template. Check the notification in force on the date gratuity becomes payable, because a wrong ceiling either short pays the employee or over provides for the employer.
Section 53(5) is the other half of the point. Nothing in the section affects the right of an employee to receive better terms of gratuity under any award, agreement or contract with the employer. A contractual gratuity scheme more generous than the Code survives the Code, and the ceiling in the notification does not cut it down.
Continuous service and the two hundred and forty day test
Section 54 defines continuous service. Clause (A) treats an employee as in continuous service for a period if his service was uninterrupted, and expressly counts interruptions on account of sickness, accident, leave, absence without leave not treated as a break under the standing orders, lay off, strike, lock out or cessation of work not due to the employee's fault.
Clause (B) is the deeming provision that decides most disputes. Where an employee is not in continuous service within clause (A), he is deemed to be in continuous service for a period of one year if in the twelve calendar months preceding the reference date he has actually worked for not less than two hundred and forty days, or one hundred and ninety days if employed below ground in a mine or in an establishment which works for less than six days a week. For a period of six months the corresponding figures are one hundred and twenty days and ninety five days.
The Explanation to clause (B) counts, as days actually worked, days of lay off under an agreement or standing orders, days of leave with full wages earned in the previous year, days of absence due to temporary disablement caused by an employment accident, and in the case of a female employee, maternity leave up to twenty six weeks. That last inclusion is the one employers most often get wrong on the payroll system.
Clause (C) sets the seasonal establishment test at seventy five per cent of the days the establishment was in operation.
Nomination
Section 55 requires every employee who has completed one year of service to make a nomination in the form the appropriate Government prescribes, and the gratuity may be distributed among more than one nominee. If the employee has a family, the nomination must be in favour of one or more members of it, and a nomination in favour of anyone else is void. If he has no family then and acquires one later, the earlier nomination becomes invalid and a fresh one must be made. Where a nominee predeceases the employee the interest reverts. The employer keeps every nomination in safe custody.
The reason this matters is the third proviso to Section 53(1). On death, gratuity is paid to the nominee, and only if there is no nomination does it go to the heirs. A missing or void nomination turns a thirty day payment into a succession dispute at the worst possible moment for a family.
When gratuity can be forfeited
Section 53(6) permits forfeiture in two situations, and they are not the same. Under clause (a), where the employee's services have been terminated for an act, wilful omission or negligence causing damage or loss to, or destruction of, the employer's property, the gratuity is forfeited to the extent of the damage or loss so caused. Under clause (b) it may be wholly or partially forfeited where the services were terminated for riotous or disorderly conduct or an act of violence, or for an act constituting an offence involving moral turpitude committed in the course of employment.
The Supreme Court read the identical language of the 1972 Act in Union Bank of India v. C.G. Ajay Babu, decided on 14 August 2018 and reported at (2018) 9 SCC 529. The question was whether forfeiture is automatic on dismissal from service. It is not. On the damage limb, the amount forfeited can only be to the extent of the damage or loss, and the disciplinary authority has to quantify it. On the moral turpitude limb, the Court held that the requirement of the statute is not proof of misconduct involving moral turpitude but that the acts should constitute an offence involving moral turpitude, and that such offence should be duly established in a court of law. The Court also held that the Act prevails over gratuity rules framed by the employer.
In plain terms, a domestic enquiry finding is not a conviction, and an employer cannot forfeit gratuity by writing "moral turpitude" into a dismissal order. If gratuity has been withheld on that basis, the reply to the show cause notice is where the case is won or lost, as it is in the wider termination fight described in wrongful termination and employee rights in India. Where the allegation is a second job, see moonlighting and dual employment in India; where it arises from a workplace complaint, see the POSH complaint procedure and how to challenge an internal committee report.
If the employer does not pay
- Send the written application. Section 56(1) allows the eligible person, or someone authorised in writing, to apply to the employer in the prescribed form. Send it by a mode that produces proof of delivery.
- Note that the employer's duty does not depend on your application. Section 56(2) requires the employer, as soon as gratuity becomes payable, to determine the amount and give written notice to the person entitled and to the competent authority, whether or not an application has been made.
- Count thirty days. Section 56(3) requires payment within thirty days from the date the gratuity becomes payable.
- Claim interest. Section 56(4) makes the employer liable to simple interest from the date the gratuity became payable to the date of payment, at a rate not exceeding the rate notified by the Central Government for repayment of long term deposits, unless the delay was the employee's fault and the employer has written permission from the competent authority.
- Take the dispute to the competent authority. Under Section 56(5) the employer must deposit the amount he admits, and the employer, the employee or any other person raising the dispute may apply to the competent authority, which decides after inquiry and can direct payment of the balance.
- Expect a real inquiry. Section 56(6) gives the competent authority the powers of a civil court in respect of attendance, discovery, affidavits and commissions, and Section 56(7) makes the inquiry a judicial proceeding.
- Appeal within sixty days. Section 56(8) allows an appeal to the appropriate Government or the authority it specifies, extendable by a further sixty days for sufficient cause. An employer's appeal is not admitted unless he produces a certificate of deposit or deposits the amount with the appellate authority.
That deposit condition on an employer's appeal is worth pressing. It converts an appeal from a delaying tactic into a decision the employer has to fund. Where the amount is large and the employer is disputing the claim commercially rather than legally, our money recovery practice and our civil litigation practice deal with the enforcement end of it.
Tax on gratuity
The Income-tax Act, 1961 was repealed with effect from 1 April 2026 and the exemption now sits in Section 19 of the Income-tax Act, 2025, in the table to sub-section (1). Serial number 3 exempts death cum retirement gratuity in full. Serial number 5 deals with gratuity received under the Payment of Gratuity Act, 1972, restricted to the amount calculated under Sections 4(2) and 4(3) of that Act. Serial number 6 is the residuary entry for any other gratuity received on retirement, on incapacitation before retirement or on termination, and caps the deduction at the least of the actual gratuity received, the amount specified by the Central Government by notification having regard to the limit for Central Government employees, and half a month's salary for each completed year of service computed on the average salary of the ten months preceding the event.
Two features of that table should be flagged rather than glossed over. The cap in the residuary entry is again a notified figure, so the same instruction applies as for the ceiling under the Code. And the specific entry is framed by reference to an Act that has since been repealed. Have the exemption computed by a chartered accountant for your tax year before the amount is reported.
Frequently Asked Questions
Is the Payment of Gratuity Act, 1972 still in force?
No. It was repealed by Section 164 of the Code on Social Security, 2020, and gratuity is now governed by Chapter V of the Code, principally Sections 53 to 56. The four labour codes were brought into force on 21 November 2025.
Do I still need five years of service?
Yes, as the general rule under Section 53(1). The second proviso removes the requirement where the employment ends by death or disablement or on expiration of fixed term employment, and the first proviso reduces it to three years for a working journalist.
Is gratuity payable if I resign?
Yes, once you have five years of continuous service. Section 53(1)(b) covers retirement and resignation in the same breath, and there is no distinction between the two.
What is the maximum gratuity payable?
Section 53(3) says the amount shall not exceed such amount as may be notified by the Central Government. There is no figure in the Code, and there has been none in the statute since Act 12 of 2018 replaced the words "ten lakh rupees" in the 1972 Act with a notified amount. Check the notification in force rather than a remembered figure.
I am on an eleven month fixed term contract. Do I get gratuity?
The Code makes gratuity payable on expiry of a fixed term without five years of service, on a pro rata basis. The Ministry of Labour and Employment has stated in its Additional FAQs as on 16 March 2026 that a fixed term employee is eligible if he or she renders service under the contract for a period of one year from the start of the contract, so an eleven month contract that ends on time is the very case to take advice on.
Can my employer forfeit gratuity because I was dismissed?
Not automatically. In Union Bank of India v. C.G. Ajay Babu the Supreme Court held that forfeiture for damage or loss is limited to the quantified extent of that loss, and that forfeiture for moral turpitude requires that the act constitute an offence involving moral turpitude duly established in a court of law, not merely misconduct proved in a domestic enquiry.
How long does the employer have to pay?
Thirty days from the date gratuity becomes payable, under Section 56(3), with simple interest for the delay under Section 56(4). The employer must determine the amount and give notice under Section 56(2) whether or not you applied.
This article is for general informational purposes only and does not constitute legal advice. Consult a qualified advocate for advice on your specific situation.
Related Guides
- Gratuity Rules, Eligibility and Calculation in India
- The Four Labour Codes: What Changed for Employees
- Are You a Worker Under the Industrial Relations Code?
- Wrongful Termination and Employee Rights in India
- Employment Agreements in India
- Moonlighting and Dual Employment in India
- Temporary Status, Casual Labourers and Pension
- POSH Act Complaint Procedure in India
- The Employer Owes You Money and Will Not Pay: Section 59
- Notice of Change: The Twenty One Days Before Your Terms Can Be Altered
