Gratuity & Social Security Code

Gratuity is a lump-sum payment made by an employer to an employee upon separation — typically at retirement, resignation after qualifying service, or in cases of death or disablement. It is a statutory entitlement for eligible employees.

Gratuity is a component in the FnF (Full and Final) settlement process and is estimated in the Precision Payroll FnF Settlement Calculator.

Gratuity is now governed by the Code on Social Security, 2020 (Act No. 36 of 2020), which consolidated the Payment of Gratuity Act, 1972 and other social-security legislation. The Code on Social Security, 2020 became effective across India from 21 November 2025.

For salary periods and employment records predating the Code's commencement, the Payment of Gratuity Act, 1972 remains relevant as the predecessor statute. Many substantive provisions of the 1972 Act have been carried forward into the Code, but the official text of the Code should be consulted for the current position.

Gratuity eligibility under the standard rule requires:

• Completion of a minimum qualifying period of continuous service (typically 5 years)
• Employment in an establishment covered by the applicable provisions
• Separation by retirement, resignation, retrenchment, death or disablement

Note that in cases of death or disablement, the 5-year minimum service requirement may not apply. Fixed-term employment provisions may also affect gratuity eligibility and calculation.

Eligibility rules can vary by establishment type, state notifications and employment contract. Verify with a qualified professional for specific circumstances.

Under the standard formula, gratuity is calculated on:

• Basic Salary + Dearness Allowance (DA) at the time of separation

Other allowances (HRA, special allowance, conveyance) are generally not included in the gratuity wage base under the standard formula. The definition of “wages” for gratuity purposes under the Code on Social Security, 2020 may differ from earlier interpretations — review the official text and applicable guidance.

The service period for gratuity calculation is measured from the date of joining to the last working day. Partial years are treated as follows under the standard rule:

• Service of 6 months or more in the last year of employment is rounded up to one full year
• Service of less than 6 months in the last year is not counted

The Precision Payroll FnF Calculator computes tenure in years, months and days based on the joining date and last working date you enter. The service-year figure used for gratuity is derived from this tenure.

The standard statutory gratuity formula:

Where “15/26” represents 15 days' wages for each completed year of service (using 26 as the working-days divisor for a month).

This is the standard formula under the historical Payment of Gratuity Act, 1972 provisions carried into the Code. Some industries, establishments and employment contracts may use different formulas or provide gratuity exceeding the statutory minimum.

In Precision Payroll, gratuity is computed as part of the FnF Settlement Calculator. The gratuity result is an estimate of the statutory gratuity provision based on inputs you provide.

Important:

• A saved FnF calculation containing a gratuity estimate is a draft scenario record
• It does not constitute a formal gratuity payment or settlement confirmation
• Saving an FnF record does not automatically update employee master data or employment status
• The actual gratuity payable requires HR/payroll verification and employer confirmation

The Precision Payroll FnF/gratuity estimate does not:

• Separately compute the tax-exempt and taxable portions of gratuity
• Account for special gratuity provisions in specific industry/establishment types
• Handle gratuity forfeiture scenarios
• Account for employer's gratuity fund or insurance arrangements
• Constitute an EPFO, government or employer certificate