Gratuity Under the Social Security Code: Section 53, and the Ceiling Nobody Has Notified

Quick answer

Gratuity moved. The Payment of Gratuity Act, 1972 was repealed on 21 November 2025 and gratuity now sits in section 53 of the Code on Social Security, 2020: five years' continuous service, with four exceptions; 15 days' wages for every completed year or part in excess of six months, on the wages last drawn. Two things changed underneath it — the wages base now carries the Code on Wages 50% add-back, and the maximum is unresolved, because section 53(3) requires a notification we could not locate.

Who this is for

Finance teams setting a gratuity provision for the year. HR teams answering "do I get gratuity?" for someone with four years and eight months, or someone on a fixed-term contract. Founders who have never provisioned for it and are about to have their first five-year leaver. And anyone who was told the ceiling is ₹20 lakh and wants to know why that is a more complicated answer than it looks.

What actually changed on 21 November 2025

S.O. 5319(E) brought the Code on Social Security, 2020 into force on that date. Section 164(1) of the Code repeals nine enactments, and the Payment of Gratuity Act, 1972 is among them.

The Rules followed later: the Social Security (Central) Rules, 2026 (G.S.R. 344(E), 8 May 2026) superseded twelve earlier rule-sets, including the Payment of Gratuity (Central) Rules, 1972. Rules 31 to 33 of the 2026 Rules deal with gratuity invested for a minor, nomination, and application and appeal.

What this means for anything you read about gratuity that predates November 2025: the section numbers are wrong even where the substance survives. "Section 4(3) of the Payment of Gratuity Act" is a citation to a repealed statute. The current provision is section 53 of the Code.

What it does not mean: that the entitlement changed beyond recognition. Most of section 53 reads as a re-enactment. The two genuine movements are the wages base and the ceiling.

Who is covered

The First Schedule to the Code, read with sections 1(4), 1(8) and 152(1), applies Chapter V to:

• every factory, mine, oilfield, plantation, port and railway company; and
• every shop or establishment in which ten or more employees are employed, or were employed, on any day of the preceding twelve months.

That second limb repays a careful read. It is not "ten or more employees today". It looks back across the preceding twelve months and asks whether the threshold was met on any day in that period. An establishment that peaked at twelve people in November and is down to eight in August is still inside it.

Section 53(1): the qualifying service, and the four exceptions

The rule: gratuity is payable to an employee on the termination of employment after rendering continuous service for not less than five years, on the events listed in section 53(1)(a) to (e):

• (a) superannuation;
• (b) retirement or resignation;
• (c) death or disablement due to accident or disease;
• (d) termination of the contract period under fixed-term employment;
• (e) any such event as may be notified by the Central Government.

The first proviso substitutes three years for five in the case of working journalists as defined in the Working Journalists and other Newspaper Employees (Conditions of Service) and Miscellaneous Provisions Act, 1955.

The second proviso is the one to know. The five-year requirement is not necessary where the termination is due to:

1. death;
2. disablement;
3. expiry of fixed-term employment; or
4. a notified event.

Item 3 is the change most employers have not budgeted for. A two-year fixed-term contract that runs its course now generates a gratuity entitlement, without any five-year qualification — and the third proviso to section 53(2) makes it payable pro rata.

Where gratuity is payable on death, section 53 provides for payment to the nominee or, where there is no nomination, to the heirs; and where a nominee or heir is a minor, the share is deposited with the competent authority and invested for the minor's benefit until majority. Rule 31 of the Social Security (Central) Rules, 2026 deals with that investment.

Section 53(2): the arithmetic

…for every completed year of service or part thereof in excess of six months, the employer shall pay gratuity to an employee at the rate of fifteen days' wages or such number of days as may be notified by the Central Government, based on the rate of wages last drawn by the employee concerned.

Three components, each of which is where a calculation goes wrong.

"Every completed year of service or part thereof in excess of six months"

Rounding is up at six months and one day, down at six months exactly or less. So:

That last row is the important one. The rounding rule operates within the entitlement; it does not create one. Four years and eleven months is not five years, and unless death, disablement, expiry of a fixed term or a notified event applies, there is no entitlement to round.

"Fifteen days' wages"

Fifteen days out of a month. The conventional divisor for a monthly-paid employee is 26, being the working days in a month, so a day's wages is monthly wages ÷ 26 and fifteen days' wages is monthly wages × 15 ÷ 26.

The Code words it as "fifteen days' wages or such number of days as may be notified by the Central Government" — so the fifteen is itself displaceable by notification.

"The rate of wages last drawn"

This is where the Labour Codes did their real work on gratuity.

"Wages" now carries the definition in section 2(88) of the Code on Social Security, which is materially similar to section 2(y) of the Code on Wages — including its 50% add-back: where the excluded allowances exceed one-half of total remuneration, the excess is deemed to be remuneration and added into wages. (We describe section 2(88) qualitatively rather than quoting it, because it was not re-read line by line in the capture this article rests on.)

Two consequences, and the second is the uncomfortable one.

1. An allowance-heavy structure raises the gratuity base, because the add-back raises "wages last drawn".
2. It raises the liability across the whole of past service, because the formula multiplies wages last drawn by years of service. It is not computed year by year on historical wages. So the change reaches back through every year an employee has worked, for anyone who leaves after it.

If you have not re-tested your salary structure since November 2025, what counts as wages for PF, ESI and gratuity works the 50% arithmetic through three structures.

The two special cases

• Seasonal establishments — the second proviso to section 53(2): seven days' wages for each season.
• Fixed-term employees and deceased employees — the third proviso: gratuity is payable on a pro rata basis.

A worked example

An employee joins on 1 July 2019 and resigns on 15 March 2027. Monthly remuneration at exit is ₹80,000, structured as basic ₹32,000, HRA ₹16,000, conveyance ₹8,000, special allowance ₹14,000 and commission ₹10,000.

Step 1 — qualifying service. 1 July 2019 to 15 March 2027 is 7 years and about 8.5 months. Over five years, so the entitlement exists. The part is in excess of six months, so it rounds up: 8 completed years.

Step 2 — wages last drawn, after the add-back. Excluded components are HRA ₹16,000 + conveyance ₹8,000 + special allowance for expenses ₹14,000 + commission ₹10,000 = ₹48,000. Half of total remuneration is ₹40,000. The excess is ₹8,000, deemed remuneration and added into wages.

Wages = ₹32,000 + ₹8,000 = ₹40,000 per month.

(Without the add-back, the structure was designed to produce a ₹32,000 base. The proviso raises it by a quarter.)

Step 3 — the amount.

₹40,000 × 15 ÷ 26 × 8 years = ₹1,84,615 (rounded to the rupee).

Had the base stayed at ₹32,000, it would have been ₹1,47,692. The difference of about ₹37,000 on one employee is the 50% rule, applied once, at exit — and it applies to everyone on a similar structure.

Step 4 — the ceiling. Below whatever ceiling applies, so it does not bite here. See the next section for why that sentence is more careful than it looks.

The ceiling: what is honestly known

Section 53(3) provides that the amount of gratuity "shall not exceed such amount as may be notified by the Central Government."

That is a delegation. It requires a notification to have any figure at all — and we did not locate a notification under section 53(3) in the capture this article rests on.

The ₹20,00,000 everyone quotes comes from section 4(3) of the Payment of Gratuity Act, 1972 — an Act repealed with effect from 21 November 2025. Notifications under repealed enactments are, however, saved by section 164(2)(a) of the Code: everything done under the repealed enactments is deemed done under the corresponding provisions of the Code and stays in force to the extent not contrary to the Code, until repealed under the Code.

So the accurate formulation, and the one we use, is:

₹20,00,000, carried forward under the savings provision in section 164(2)(a), pending a notification under section 53(3).

Not "the Code ceiling is ₹20 lakh". The difference matters for two reasons: it tells a reader the figure is contingent, and it tells a finance team that a notification could move it without any amendment to the Code.

One related point on the savings provision, since commercial trackers get it wrong. Section 164(2)(b) — which would have put a hard one-year sunset on the schemes and rules continued under the Code — was not among the provisions notified by S.O. 5319(E), which listed only clauses (a) and (c) of section 164(2). Several trackers state a one-year clock as fact. The gazette does not support it as at the date of that notification. A corrigendum, S.O. 5936(E) of 19 December 2025, corrected some entries in S.O. 5319(E), and its exact wording was not captured — so we treat the one-year sunset as unresolved and do not publish it as a deadline.

Section 53(6): forfeiture, and its limits

Gratuity is not unconditional, but forfeiture is not a general discretion either. Section 53(6) provides two distinct grounds:

• To the extent of the damage or loss caused — where the employee's services have been terminated for any act, wilful omission or negligence causing damage or loss to, or destruction of, property belonging to the employer. The forfeiture is measured by the loss, not by the gratuity.
• Wholly or partially — where the services have been terminated for riotous or disorderly conduct or any other act of violence, or for an offence involving moral turpitude committed in the course of employment.

Note the framing in both limbs: the termination has to have been for that conduct. Forfeiture is not available as a general set-off against an ordinary resignation.

Section 53(5) preserves better terms: where an employee is entitled to better terms of gratuity under an award, agreement or contract with the employer, those prevail. So a generous contractual gratuity clause is not displaced by the Code.

What to provision, and when

Gratuity is not a monthly remittance, which is exactly why it gets forgotten until somebody with six years' service resigns and the number arrives as a surprise in a single month.

The conventional monthly accrual is 15/26 ÷ 12 — approximately 4.81% of wages. Worth being precise about what that is and is not:

• It is a provisioning convention, not a statutory rate. Nothing in section 53 requires a monthly accrual.
• It applies to wages after the 50% add-back, not to basic pay.
• It accrues for employees who have not yet completed five years, because you cannot know which of them will. Whether you provide for them, and on what probability, is an accounting judgement — and one your auditor will have a view on.

Two things worth doing once, now, if you have not:

1. Re-price the existing liability on post-add-back wages across the whole service history of everyone above five years. That is where the step change sits.
2. Model your fixed-term hiring, because the five-year requirement does not apply on expiry of a fixed term and the amount is pro rata. A fixed-term model that assumed no gratuity exposure is out of date.

Gratuity provisioning is a bookkeeping job as much as a payroll one, and it is one reason payroll and accounting services should not sit in different systems with different wage figures.

Common mistakes

• Citing the Payment of Gratuity Act, 1972. Repealed 21 November 2025. The provision is section 53 of the Code on Social Security, 2020.
• Stating ₹20,00,000 as the Code ceiling. Section 53(3) requires a notification; the figure in circulation is carried forward under the savings provision.
• Computing on basic pay. The base is "wages last drawn", and wages now carries the 50% add-back.
• Provisioning on the old base. The liability moved across all past service for future leavers, not just prospectively.
• Assuming fixed-term staff never qualify. Expiry of a fixed term is one of the four cases where five years is not required, and the amount is pro rata.
• Rounding four years and eleven months up to five. The rounding rule operates within an existing entitlement; it does not create one.
• Treating the ten-employee test as a snapshot. The First Schedule looks back across the preceding twelve months, on any day.
• Treating forfeiture as a general discretion. Section 53(6) has two defined grounds, and the damage-or-loss limb is measured by the loss.
• Overriding a better contractual entitlement. Section 53(5) preserves it.
• Publishing a one-year sunset for the saved schemes and rules. Section 164(2)(b) was not among the provisions notified by S.O. 5319(E).

What to do next

1. List everyone above five years' service, and everyone on a fixed-term contract regardless of tenure.
2. Compute wages last drawn after the 50% add-back for each, not basic pay.
3. Re-price the liability: wages × 15 ÷ 26 × completed years, with the part-year rounding.
4. Set the monthly accrual on the post-add-back figure and agree the treatment of under-five-year staff with your auditor.
5. Diarise a check on section 53(3) — a notification under it would fix the ceiling under the Code, and until then the figure you are using is a saved one.

If you want the provision re-priced properly on your own bands, with the fixed-term exposure modelled alongside it, that is part of the scope of payroll management — and the payroll compliance guide sets out the monthly calendar it sits inside.

Sources and currency

Applies to: India. Code on Social Security, 2020, in force from 21 November 2025 (S.O. 5319(E)). Social Security (Central) Rules, 2026 (G.S.R. 344(E), 8 May 2026), which superseded the Payment of Gratuity (Central) Rules, 1972. Code on Wages, 2019 for the wages definition. Read on 19 August 2026.

Section 53 was read from the India Code text of the Code on Social Security, 2020. The maximum amount of gratuity is deliberately not stated as a settled figure — section 53(3) requires a Central Government notification and no notification under it was located in the capture this article rests on. The ₹20,00,000 in circulation comes from the repealed Payment of Gratuity Act, 1972 and is described here as carried forward under the savings provision, pending a section 53(3) notification. Section 2(88) of the Code is described qualitatively rather than quoted, because it was not re-read line by line. Nothing here is advice on an individual entitlement.

• Code on Social Security, 2020 (Act 36 of 2020) — First Schedule, section 2(88) wages, section 53 gratuity and section 164 repeals and savings
• Gazette of India, S.O. 5319(E) dated 21 November 2025 — commencement of the Code on Social Security, 2020 and the repeal of the enactments listed in section 164(1)
• Social Security (Central) Rules, 2026 — G.S.R. 344(E), 8 May 2026, superseding twelve earlier rule-sets including the Payment of Gratuity (Central) Rules, 1972 (English text from p.134)
• Code on Wages, 2019 (Act 29 of 2019) — section 2(y) and the 50% proviso that moves the wages base