The code on Social Security, 2020, has made a radical change to the calculation of gratuity to be given to salaried employees in India, with the implementation of the New Labour Law 2025. The new definition of wage, which is now in effect throughout the country, is likely to be a significant boost to the gratuity payouts, especially among those who are in the 6 lakh, 12 lakh and 24 lakh annual CTC range.
Background of the Reform
Traditionally, gratuity calculation in India has been determined on the basis of basic pay and some allowances, which in many cases was a very small part of the entire salary, particularly those of the CTC system in the private sector. Since firms have moved more towards allowances and variable pay, the amount of gratuity given to many employees has continued to be low.
This gap was addressed by the new labour codes that redefined the concept of compensation on wages in all the social-security calculations. Fifty per cent of the total CTC should be regarded under the 2025 rules as being treated as wages. All the allowances that lie beyond the 50% limit are to be subtracted back wages. The wage base is automatically healthier through this new structure, which results in a rise in the amount of gratuity at all levels of the salary structure.
Major alterations in the calculation of gratuity
1. New Wage Definition
Less than half of all CTC will now be considered as wages for gratuity.
Any allowances that have been excluded above the 50 per cent figure should be reinstated.
2. Increased Mid-Income Salary Gratuity
The new rules will increase the rates of annual accrual of gratuity to employees with CTCs of 6, 12 and 24 lakh in an appreciable manner.
3. Fixed-Term Employees: One-Year Eligibility
Contractual or fixed-term employees also stand a chance to be given gratuity after five years of service, as opposed to the previous five years in the law.
What will be the Benefit of employee Be?
The new wage structure suggests that the following increases have been experienced through analyses:
CTC: ₹6 lakh per annum
Old wage base: approx. ₹3 lakh
New wage base: approx. ₹3.9 lakh
Gratuity raise: between 14,000 and 19,000 a year.
CTC: ₹12 lakh per annum
Old wage base: approx. ₹6 lakh
New wage base: approx. ₹7.9 lakh
Gratuity increment: approximately 28000 to 38000 a year.
CTC: ₹24 lakh per annum
Old wage base: approx. ₹12 lakh
New wage base: approx. ₹15.8 lakh
Gratuity increment: approximately from 57,000 to approximately 76,000 per year.
In general, the gratuity payouts increase by 25-50 per cent according to the pay system.
The reason why this is important to the Workforce.
The new policies will go a long way in enhancing the retirement benefits of the growing salaried workforce and, most importantly, those in IT, services, manufacturing, e-commerce and start-ups where allowance-based CTCs are rife.
The reform brings:
- Increased long-term social security.
- High retirement corpus.
- Better parity between low, mid and high CTC earners.
- More contract and gig workers, as well as fixed-term workers.
Nonetheless, according to HR specialists, the salaries of people working at home can fall slightly because the companies reorganise the payroll to meet the wage regulation of the wage as 50.
Expert Views
Labour economists refer to the shift as a corrective shift that will bring the practices of Indian compensation into alignment with global wage rates. Prof. Meera Nair, a researcher of labour policy, argues that the increased definition of wage would mean that the gratuity is based on the actual earnings and not on the artificially lower basic salary.
Those in the industry, however, warn that the shift can add to the payroll taxes of the employer, particularly in industries of high turnover and a high number of contracted employees.
Frequently Asked Questions
The new regulation requires a minimum of 50 percent of the CTC of an employee be counted as wages in computing gratuity, which results in an increase in payouts.
These workers will have the accrued gratuity of 25-50 increase due to the increased base of wage.
Yes. Gratuity can be availed to the employees with tenure after a year of uninterrupted service.
Possibly. With employers reworking the elements of salary, PF and gratuity payments can go up at the expense of monthly in-hand rate of payment.
Yes. The Code on Social Security also applies to the scheme of the benefits of the gig and platform workers, including gratuity.
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