New Gratuity Rules

Gratuity is a cornerstone of financial security for employees, serving as a token of appreciation for their service. With the introduction of new gratuity rules under the Social Security Code 2020, significant updates have been made to provide enhanced benefits to employees, retirees, and even fixed-term workers. These changes, effective from November 21, 2025, aim to make gratuity more inclusive and beneficial for the workforce.

In this article, we will explore what gratuity is, the importance of the new rule changes, the updated eligibility criteria, and how gratuity is calculated under the new framework. Additionally, we will provide insights into how these changes can positively impact financial planning and how Bajaj Finance Fixed Deposit can complement your financial goals.

What is gratuity and how does it work?

Gratuity is a statutory benefit provided by employers to employees as a gesture of gratitude for their long-term service. Governed by the Payment of Gratuity Act, 1972, it applies to organisations with 10 or more employees and is paid to employees who have completed a minimum of 5 years of continuous service. Gratuity is typically calculated based on the employee's last drawn salary and the number of years worked.

With the new gratuity rules coming into effect, employees, including fixed-term workers, can now benefit from enhanced inclusivity and better financial security. These changes align with broader efforts to improve employee welfare and financial stability. 

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The updated gratuity rules have practical implications for employees across various sectors. Here is why these changes are significant:

• Enhanced inclusivity: Fixed-term employees are now eligible for gratuity after just 1 year of continuous service, broadening the scope of beneficiaries.
• Improved financial security: The new rules ensure that gratuity calculations are more equitable, taking into account at least 50% of an employee's CTC.
• Tax benefits: Gratuity payments up to Rs. 20 lakh are tax-exempt, providing significant savings for retirees.
• Support during unforeseen events: Gratuity is payable irrespective of service duration in cases of death or disablement, ensuring financial support for families.

The new gratuity rules, introduced under the Social Security Code 2020, bring the following key updates:

• Reduced eligibility for fixed-term employees: Employees on fixed-term contracts are now eligible for gratuity after 1 year of continuous service instead of 5 years.
• 50% wage rule: Employers must calculate gratuity based on a salary structure where at least 50% of the CTC is considered as wages.
• Rounding off tenure: Service periods exceeding 6 months are rounded up to the nearest year, ensuring fairer calculations.

These updates aim to provide better financial stability and inclusivity for employees, especially those in contractual or fixed-term roles.
 

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The new gratuity rules benefit a wide range of employees, including:

• Fixed-term employees: Workers on short-term contracts now have access to gratuity benefits after just 1 year of service.
• Private sector employees: The 50% wage rule ensures fairer gratuity calculations, especially for employees with low basic salaries.
• Senior citizens and retirees: The tax exemption limit of Rs. 20 lakh ensures significant savings for retirees.
• Families of deceased employees: Gratuity is payable irrespective of service duration in cases of death, providing financial support to families.

Gratuity is calculated differently for organisations covered and not covered by the Payment of Gratuity Act, 1972. 

Below is an overview of the updated formula:

For organisations covered by the Act

Gratuity = (15 x Last Drawn Salary x Number of Working Years) / 26

• Last Drawn Salary: Includes basic salary and dearness allowance (DA).
• Working Years: Rounded up if the service exceeds 6 months.

Example:

• Employee: Mr. A
• Service: 12 years (rounded from 11 years and 8 months)
• Last Drawn Salary: Rs. 75,000
• Gratuity = (15 x Rs. 75,000 x 12) / 26 = Rs. 5,19,230

For organisations not covered by the Act

Gratuity = (15 x Last Drawn Salary in Last 10 Months x Number of Working Years) / 30

Example:

• Employee: Ms. B
• Service: 14 years
• Last Drawn Salary: Rs. 75,000
• Gratuity = (15 x Rs. 75,000 x 14) / 30 = Rs. 5,25,000

Employees can use online gratuity calculators, such as the one provided by Bajaj Finance, to estimate their gratuity amount accurately. Pair your gratuity savings with Bajaj Finance Fixed Deposit for a stable and higher growth opportunity. Check eligibility. 

The new gratuity rules mark a significant step towards enhancing financial security and inclusivity for employees across various sectors. By reducing eligibility requirements for fixed-term employees and ensuring fairer calculations, these changes empower employees to plan their financial future more effectively.

To complement your gratuity benefits, consider investing in a Bajaj Finance Fixed Deposit. With assured returns, flexible tenures ranging from 12 to 60 months, and a minimum deposit requirement of just Rs. 15,000, it is an excellent way to grow your savings. Senior citizens can also enjoy an additional interest rate boost of up to 0.35%.

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