Gratuity Rules 2025: The 1-Year Liability Impact
For 50 years, the Payment of Gratuity Act, 1972 mandated a 5-year continuous service period for gratuity eligibility. The Code on Social Security, 2020 fundamentally alters this provision for Fixed Term Employees (FTE), reducing the threshold to one year.
1. The Legal Mandate: Section 53
The new Code introduces a clear distinction between permanent staff and fixed-term employees. While the 5-year rule persists for regular employment, FTEs are now entitled to gratuity on a pro-rata basis immediately upon completing one year of service.
Key Compliance Requirement
Employers must provision for gratuity in the books of accounts annually for all FTEs, regardless of contract length (if > 1 year).
2. Financial Impact Analysis
This amendment transforms gratuity from a “Contingent Liability” (payable only if they stay 5 years) to a “Definite Liability” (payable at end of contract).
Comparison Table
| Employee Category | Old Regime (1972 Act) | New Regime (2025 Code) |
|---|---|---|
| Regular / Permanent | 5 Years Minimum | 5 Years Minimum |
| Fixed Term Employee | 5 Years (Rarely eligible) | 1 Year (Pro-rata basis) |
Cost Implication
For an employee with a Basic Pay of INR 30,000 on a 3-year contract:
- Pre-2025: Liability = 0 (Service less than 5 years).
- Post-2025: Liability = INR 51,923 (approx).
3. Strategic Action Plan
Contract Structure: It is advisable to include the Gratuity component (approx. 4.81% of Basic) as part of the Cost to Company (CTC) for Fixed Term Employees. This ensures the payout is budgeted and does not impact the P&L as an unforeseen expense.
Actuarial Valuation: Companies must engage an Actuary to re-evaluate their Gratuity provisions for the current financial year to account for this change.
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