New Gratuity Rule (As per Code on Wages 2020)

After the introduction of the new Code on Wages, many people are confused. The new Code on Wages has a very wide impact—on PF, ESIC, Gratuity, CTC structure, leave encashment, and many other related areas.

One of my friends joined a company 12 months ago. Recently, he called me and said, “Bhai, I have resigned. How much gratuity will I get?” He was even ready to fight a legal case against the company to demand gratuity.

The reality was that he was not aware of the actual gratuity rules and could not properly understand the changes under the new Code on Wages.

So, in this post, I am focusing only on gratuity.

You already know the basic gratuity rules—when gratuity is applicable, how it is calculated, and the special case of 4 years and 240 days. If you are not aware, you can read my detailed blog on gratuity.

As you know, gratuity is a lump-sum payment paid to an employee at the time of resignation, retirement, or in case of the employee’s death, it is paid to the nominee.

Now, under the Code on Wages 2020, there are two major impacts on gratuity:

1. Gratuity amount will increase

As per the new Code on Wages, Basic + DA should be at least 50% of the total CTC. So, if Basic + DA increases, naturally, the gratuity amount will also increase.

2. Change in gratuity eligibility for Fixed-Term / Contract Employees

This is the second major concern—when gratuity will be payable.

For regular employees, the old eligibility rule remains the same (5 years of continuous service).The change is mainly for Fixed-Term or Contractual Employees. Earlier, they had to complete 5 years, which was practically not possible.
Now, as per the new rule, gratuity eligibility for fixed-term or contractual employees is reduced to 1 year.

It is very simple. When someone joins as a fixed-term or contract employee, the appointment or contract letter clearly mentions that the job is for 1 year or 2 years, and after that, the contract may be renewed or discontinued.

In such cases, expecting an employee to wait for 5 years for gratuity does not make sense. That is why this new gratuity rule is mainly for fixed-term and contractual employees.

For example:

• If I have a 2-year contract and I work for 1 year and 1 month, then I will be eligible for gratuity.
• But if I leave the company within 5 months, then gratuity will not be payable.

The logic is very simple. There is no need to be confused.

If you want to use a gratuity calculator, you can use the link I have shared, or you can find it in the calculator section on my website.