1. The 1-Year Gratuity Rule for Contract Employees
The most significant gratuity change in the Code on Social Security 2020 is the introduction of pro-rata gratuity for fixed-term contract employees after just 1 year of service.
Previously, gratuity under the Payment of Gratuity Act 1972 required a minimum of 5 continuous years of service for all employees. This meant millions of contract workers — hired for 1–2 year assignments — received nothing at the end of their contracts regardless of how long they had worked.
Old Rule (Pre-2025)
All employees — permanent or contract — required 5 continuous years of service to qualify for gratuity under the 1972 Act.
New Rule (Code on Social Security 2020)
Fixed-term contract employees now qualify after 1 year. Permanent employees still require 5 years.
Worked Example: Priya is hired on a 2-year fixed-term contract by a Bengaluru IT company. Her basic salary is ₹60,000/month. After 2 years, her gratuity under the new code:
Gratuity = (60,000 × 15 × 2) ÷ 26 = ₹69,231
Under the old 1972 Act, she would have received nothing because she did not complete 5 years.
2. The 50% CTC Wage Floor — What It Means for Your Gratuity
The Code on Wages 2019 redefines "wages" to ensure that basic pay and DA together constitute at least 50% of the total CTC. Many private sector employers had structured salaries with a low basic and high "allowances" to reduce PF and gratuity obligations.
Under the new code, if your Basic + DA is less than 50% of CTC, the gratuity calculation must use 50% of CTC as the base instead.
Example: 50% CTC Rule in Practice
Your CTC Breakdown
- Monthly CTC: ₹1,00,000
- Basic Salary: ₹25,000 (25% of CTC)
- HRA + Allowances: ₹75,000
Gratuity Base
- Old rule: Base = ₹25,000
- New rule: Base = ₹50,000 (50% of ₹1,00,000)
Result: Your gratuity effectively doubles if your employer had under-structured your basic.
3. Implementation Status — Why "2025" Is Approximate
The four codes are central legislation but require state-level notification to take effect. As of May 2026:
- States that have notified rules: Maharashtra, Uttar Pradesh, Madhya Pradesh, Haryana, Bihar, Karnataka, and others. Full enforcement varies.
- States still pending: West Bengal, Tamil Nadu, Kerala, and others have not fully notified all four codes.
Practical advice: Even in states that have notified the codes, many employers are still operating under the old 1972 Act. If you believe the new rules apply to you, document your contract type (fixed-term vs. permanent), your full CTC, and the basic/DA breakdown. A labour law professional can advise on which rules are enforceable in your state.
4. What Stays the Same
- The 15/26 formula is unchanged.
- The ₹20 lakh tax-free ceiling for private sector employees is unchanged.
- The 30-day payment deadline remains.
- Employers with 10+ employees are still covered.
- The Payment of Gratuity Act 1972 continues to apply in states that have not notified the new codes.