Gratuity New Rule: Gratuity is a lump sum payment given to employees in recognition of their long service. This payment is made under the Payment of Gratuity Act, 1972. Generally, an employee receives this benefit only if they have worked for the same company for five consecutive years. Years worked at different companies are not counted. Furthermore, this rule only applies to organisations with at least ten employees. If your office operates on a 5-day working system, you become eligible for gratuity upon completing 4 years and 190 days of service. However, if you operate on a 6-day working system, this period increases to 4 years and 240 days.
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When the Five-Year Requirement Does Not Apply
In many circumstances, the five-year minimum service requirement for gratuity does not apply. For example, if an employee dies during service or becomes permanently disabled due to a serious illness or accident, the company is required to pay gratuity immediately. In such a situation, the amount is directly paid to the employee, his or her nominee, or legal heir. The government has enacted this rule to ensure that the employee’s family is not faced with financial difficulties in the event of sudden, difficult circumstances and that their rights are protected.
Now, entitlements will be available even after just one year
A major change is set to be implemented under the Social Security Code 2020, effective November 21, 2025. According to this, fixed-term or contract employees will be entitled to gratuity after just one year of continuous service. This change is a relief for those employees who have been working for the same company for a long time, waiting to be granted permanent employee status. Separate rules apply for journalists working in the media industry. Under the Working Journalists Act, 1955, journalists are entitled to gratuity only after completing three years of service.
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Gratuity can be increased by the 50% basic salary rule
Another important rule in the Social Security Code states that the basic pay and DA must constitute at least 50% of an employee’s total CTC. Companies must determine their salary structures according to this rule. This directly impacts the gratuity amount, as it is calculated directly on the basic salary.
The formula for calculating gratuity is-
(Last basic salary × 15 / 26) × Completed years of service.
This means that the longer the service and the higher the basic salary, the higher the gratuity amount.