India’s labour landscape has undergone one of the most transformational reforms in its post‑independence history. With the enforcement of the four new Labour Codes—the Code on Wages (2019), the Industrial Relations Code (2020), the Occupational Safety, Health and Working Conditions Code (2020), and most critically, the Code on Social Security (2020)—beginning 21 November 2025, the country has shifted from a fragmented set of 29 central labour laws to a modern, unified regulatory framework.
These reforms were driven by a long‑standing need to replace India’s outdated colonial‑era labour legislation with a system that matches contemporary workplace realities. Laws governing wages, social security, dispute resolution, and safety were previously spread across numerous statutes, leading to confusion, uneven enforcement, and limited protections for the country’s large informal and contract‑based workforce. The new Codes promise simplification, uniformity, and inclusiveness: clearer definitions, predictable compliance standards, and social security coverage that expands beyond the traditional formal workforce.
Among these reforms, the Code on Social Security, 2020 stands as a cornerstone because of its effort to bring every category of worker—organised, unorganised, fixed‑term, gig, and platform—under one cohesive umbrella. It consolidates nine earlier laws including the Employees’ Provident Fund Act, Employees' State Insurance Act, Maternity Benefit Act, and importantly, the Payment of Gratuity Act, 1972, creating a unified, modern framework for social protection. The Code emphasises universal access to benefits such as provident fund, health insurance, maternity care, and gratuity, and introduces dedicated social security boards for gig and unorganised workers, marking a strong shift toward inclusive labour welfare.
A particularly significant area affected by these reforms is gratuity, a statutory terminal benefit traditionally associated with long‑term service. Under the earlier regime, gratuity was payable only after five years of continuous service (except in cases of death or disablement). This created a large protection gap for workers on fixed‑term contracts or in industries with shorter employment cycles. The new Labour Codes, however, modernise and broaden gratuity entitlements in ways that fundamentally reshape employee benefits.
Under the new gratuity provisions, the five‑year service rule continues for permanent employees, but fixed‑term employees now qualify for gratuity after just one year of continuous service, with payment on a pro‑rata basis. This is a transformative shift that expands coverage to sectors like IT, BPO, manufacturing, and gig‑based platforms where project‑based and short‑term contracts are the norm.
Equally impactful is the new standardised wage definition, which mandates that at least 50% of an employee’s total remuneration must count as “wages” when calculating statutory benefits—including gratuity. If allowances exceed 50%, the excess is added back to wages for the purpose of calculation. This change elevates the base on which gratuity is computed, often increasing the final payout for employees whose employers previously kept basic pay low and allowances high.
Thus, the new gratuity regime has a two‑fold effect on employees. First, more employees qualify, especially those in fixed‑term or contract roles who were historically excluded. Second, the amount they receive is likely to be higher, due to the 50% wage rule that lifts the calculation base. Together, these changes reflect the government’s intention to recognise modern employment dynamics and provide fairer, more inclusive financial security to India’s diverse workforce.
In essence, the new Labour Codes—particularly the Code on Social Security, 2020—mark a decisive shift in India’s social protection philosophy. By simplifying the law, expanding eligibility, and strengthening the structure of benefits like gratuity, the Codes not only support workers’ long‑term welfare but also encourage greater formalisation and transparency across industries. As India’s workforce continues to evolve, these reforms lay the foundation for a more secure, equitable, and future‑ready labour ecosystem.
The gratuity formula remains:
Gratuity = (Last drawn wages × 15 × Years of service) / 26
But now “wages” means at least 50% of total CTC, leading to higher payouts.
Under the new Codes, wages must constitute at least 50% of total remuneration for gratuity calculations:
Includes Basic Pay + Dearness Allowance + Retaining Allowance
If allowances exceed 50%, the excess is added back to wages for statutory calculations
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