All about Gratuity New Rules 2020

An employee can receive gratuity as a payback for his work and commitment towards the company.

After working in a company for a certain duration, the employee can expect payback from the employer for loyalty and commitment in the form of gratuity.

Gratuity is a way to award the endeavours and devotion of the employer for working with the company for at least 5 years.

The Payment of Gratuity Act of 1972 governs the payment of gratuities in India. As per the act, the employer is liable to pay a sum to all employees who have worked equal to or more than 5 years. Gratuity is typically considered a part of the salary and a scheme for the betterment of the employees post-retirement.

What is Gratuity?

Gratuity is a token of gratitude for an employee who has worked for 5 or more years in an organisation or company. This amount or monetary benefit is provided by the employer to the employee for working and dedicating time to the company.

Section 4 of the Payment of Gratuity Act 1972 mentions that gratuity is paid only to employees under the definition of employee according to Section 2(E) of the act.

As per the current tax laws, the tax treatment of gratuity depends on whether the act covers the employee. If the gratuity amount does not exceed the maximum limit specified by the government, employees covered under the Payment of Gratuity Act are exempted from paying tax. Any amount received above this limit is taxable. For employees not covered under the act, the exemption limit is lower.

Why are Companies Mandated to Pay Gratuity?

Companies are mandated to pay gratuity under the Payment of Gratuity Act 1972 because it is necessary and beneficial for employees post-retirement. This act is an umbrella over all central and state government agencies and departments, including defence and local governing bodies.

To bring private agencies under the ambit of this act, fulfilment of certain conditions is necessary.

What are the New Gratuity Rules?

  1. Gratuity must be paid if the company has ten or more employees in the preceding 12 months. Even if the number of employees decreases, the employer must pay the remaining employees gratuity.
  2. The employee must complete 5 years of service in the company (excluding the case of the employee becoming disabled or passing away).
  3. Gratuity is calculated based on the last salary withdrawn and years of service.
  4. The nominee will receive the gratuity upon the employee’s death.
  5. An employee is entitled to gratuity if any unfortunate circumstances, illness, or accident leads to some disability.
  6. The employee can get a gratuity if he/she has applied for a voluntary retirement scheme.

However, gratuity is not offered in case of termination or misconduct.

New Gratuity Rules 2023

Finalising and bringing into play the new Gratuity Payment Regulations 2023 under the Four Labour Code, the Ministry of Labour and Employment has introduced various changes. The changes have caused organisations to revisit their employee’s salary structure and other allowances.

The new rules necessitate changes in the basic payment policy of employees, as now organisations are required to pay 50% of the salary as basic pay. When analysing the situation, the specialists have stated that companies with less than 50% of the salary as basic pay of employees will have their salary restructured to abide to the new laws. However, the salary increase should not include a bonus or various allowances. Furthermore, this increase in basic pay automatically leads to a gratuity of a higher amount.

How Will New Changes in Gratuity Rule Benefit Employees?

As per experts, the new Occupational Law will change the employee’s salary structure. The changes in the gratuity rule are a beneficial scheme for the employees.

The new rules will increase the basic pay of employees in the form of in-hand money. Even though other benefits included in salary may be compromised, these benefits were not the primary requirement of the employee but add-on benefits.

What is a Gratuity Calculator?

Gratuity Calculator is a tool that provides an estimated figure of the gratuity amount a person would eventually receive after the service of at least five years or on retirement. It helps in the financial planning of employees to achieve their post-retirement goals. Gratuity can be calculated under the Payment of Gratuity Act 1972 as follows:

  • For those covered under the act,

    Gratuity= n*b*15 / 26

    Here, n = years served in the company,

    b = last basic salary + dearness allowance (DA)

  • For those not covered under this act.

    Gratuity= Gratuity (G) = n*b*(15/30)

    Here, n = years served in the company,

    b = last basic salary + dearness allowance (DA)

These formulas change in the case of death of a person, and the multiple of salary depending on the duration of service.


New gratuity rules introduced in 2023 have made several changes to gratuity. Employees will have an increase in basic pay.

Gratuity is an amount payable by the employer to the employee after working for at least 5 years. It is a post-retirement plan for an employee, so having appropriate knowledge of these laws is imperative for the employee and the employer in both public and private sectors. This amount can be invested in various schemes for a financially stable future. Employees claiming gratuity should go through the rules available on government websites to stay updated.


What are the eligibility criteria in India for gratuity?

Eligibility criteria for gratuity include:

  • The employee must not be working somewhere else as a full-time employee
  • The employee must be on a salary
  • The employee must be retired or resigned after working for 5 years.

Can an organisation refuse payment of gratuity?

An employee eligible for receiving gratuity can be rejected if, under the due course of service:

  • The employee has destroyed employer's property,
  • Employee is violent or disorderly or has committed an offence involving moral turpitude.

Is gratuity mandatory in India?

Yes, gratuity is mandatory for some categories of employees in India. The Payment of Gratuity Act 1972 applies to establishments with 10 or more employees, and it covers employees in factories, mines, oilfields, plantations, ports, railways, and certain other establishments as specified by the government.

What is a gratuity calculator?

Gratuity is calculated using a fixed formula.