KEY PROVISIONS OF GRATUITY LAW, THEN V/S. NOW

Gratuity is a statutory retirement benefit paid by an employer to an employee as a token of appreciation for long and continuous service. In India, this right was primarily governed under the Payment of Gratuity Act, 1972 (“Gratuity Act”), a social welfare legislation enacted to provide financial security to employees upon termination of employment due to retirement, resignation, superannuation, death or disablement and also laid down the eligibility criteria, calculation formula, coverage of establishments and the maximum ceiling payable to employees. Over the decades, India’s employment landscape has evolved significantly — from traditional, long-term employment to more dynamic, contract-based and private sector–driven work cultures.

However, with the transformation of India’s labour law regime and the consolidation of numerous labour legislations into four comprehensive labour codes, the gratuity laws have now been subsumed under the Code on Social Security, 2020 (“SS Code”). Accordingly, gratuity laws have also undergone important amendments to widen coverage and strengthen employee rights. This marked a significant shift from the earlier fragmented approach to a more integrated social security framework.

MAPPING THE SHIFT IN GRATUITY PROVISIONS:

A brief comparative analysis under both legislations related to gratuity has been set out hereinbelow, which focuses specifically on the material changes introduced to gratuity under the SS Codeas compared to the framework under the Gratuity Act. It is not intended to be an exhaustive restatement of all gratuity provisions, but rather a targeted examination of those changes that carry practical implications for employers. These include shifts in eligibility criteria, recognition of fixed-term employment, expanded compliance requirements such as gratuity insurance and different penal provisions. From a due diligence standpoint, these changes assume significance in assessing workforce structuring, contractual arrangements, and overall statutory compliance readiness under the evolving labour law regime.

Legislative Structure

Under the earlier framework, gratuity was governed by the Gratuity Act, a standalone social welfare legislation exclusively dedicated to the subject of gratuity. The consolidation of India’s labour laws has now changed this position: under the SS Code, gratuity has been subsumed within a broader, integrated social security framework alongside related legislation governing provident fund, employees’ state insurance, maternity benefit and other subjects.

Eligibility Condition

The general eligibility threshold of five years of continuous service with the same employer is retained under the SS Code, as was the position under the Gratuity Act. However, the SS Code introduces a specific and progressive exception for employees engaged in fixed-term employment. Such employees are now entitled to gratuity on a pro-rata basis upon completion of their fixed term, even if they have not completed five years of continuous service.[1]

Conditions of Entitlement

The Gratuity Act provided for payment of gratuity upon termination of employment following a minimum of five years of continuous service, covering events such as superannuation, retirement or resignation and death or disablement due to accident or disease. The SS Code retains all of these existing conditions and supplements them with two further statutory contingencies, (i) termination of fixed-term employment; and (ii) any event as may be notified by the Central Government.

Computation of Gratuity

The SS Code preserves the computation formula as established under the Gratuity Act, whereby gratuity is calculated at fifteen days' wages for each completed year of service, or for any part thereof exceeding six months, based on the last drawn wages. The SS Code does, however, confer upon the Central Government the power to prescribe a different number of days by notification.

Compulsory Insurance Obligation

Under the Gratuity Act, employers were required to obtain insurance from the Life Insurance Corporation of India or any other prescribed insurer. The SS Code modernises this requirement by broadening the pool of eligible insurers, i.e. employers are now required to obtain insurance from any insurance company regulated by the Insurance Regulatory and Development Authority of India under the Insurance Regulatory and Development Authority Act, 1999.

Penal Provisions

Under the Gratuity Act, any person who knowingly made false statements to evade gratuity obligations faced imprisonment of up to six months or a fine of up to INR 10,000, or both; general non-compliance attracted imprisonment of not less than three months and up to one year, or a fine between INR 10,000 and INR 20,000, or both; and non-payment of gratuity specifically carried a minimum imprisonment of six months, extendable up to two years (unless the court recorded reasons for reducing the sentence or imposition of a fine). Under the SS Code, non-payment of gratuity entitlements now attracts imprisonment of up to one year or a fine of up to INR 50,000, or both, for a first offence. General non-compliance with the requirements of the SS Code, or the rules, regulations or schemes framed thereunder, for which no special penalty is prescribed, is punishable with a fine of up to INR 50,000. For subsequent or repeated defaults, penalties escalate significantly, with possible imprisonment ranging from two to three years and a fine of up to INR 3,00,000 — reflecting a markedly more stringent enforcement posture.

GRATUITY LAW: PRESENT POSITION AND FUTURE DIRECTION:

A deeper reading of the transition from the Gratuity Act to the SS Code also invites a degree of critical reflection. While the SS Code stands enacted and is in force as a consolidated legislation, the rules under the SS Code are yet to be notified and respective states are also required to frame and notify their corresponding rules for effective implementation of the gratuity laws. Therefore, in practice, the well-established and judicially tested framework under the Gratuity Act continues to guide implementation and compliance. The evolution of gratuity laws in India thus stands at an interesting crossroad — where an existing, time-tested regime operates alongside a forward-looking statutory framework whose full practical impact will be realized once the corresponding rules are notified and implemented across jurisdictions in India.

[1] Fixed-term employment means the engagement of an employee on the basis of a written contract of employment for a fixed period: provided that: (a) his hours of work, wages, allowances and other benefits shall not be less than that of a permanent employee doing the same work or work of a similar nature; and (b) he shall be eligible for all benefits, under any law for the time being in force, available to a permanent employee, proportionately according to the period of service rendered by him even if his period of employment does not extend to the required qualifying period of employment