Executive Summary

This guide explains the changes introduced by the Labour Code 2025 that affect gratuity and bonus. Key practical points:

• Fixed‑term employees may become eligible for pro‑rata gratuity after one year of service
• A unified definition of “wages” expands the wage base for statutory calculations
• Employers must pay gratuity within a defined timeline and may face interest penalties for delay
• Statutory bonus continues subject to the revised wage definition and ceilings

The rest of the article breaks these topics into digestible parts, provides worked calculations, and supplies employer/employee checklists.

Table of Contents

1. Introduction & Background

The Labour Code 2025 represents a major consolidation and update of central labour laws. While the full legislative text covers many subjects, two provisions that materially affect payroll are the new approaches to the definition of wages and the improved inclusion of fixed‑term contract workers in statutory benefit schemes. For CMAs preparing for professional practice, understanding the implications for gratuity and bonus calculations — and the related accounting, provisioning and cash‑flow consequences for employers — is essential.

Why This Matters for CMAs and Payroll Teams

• Gratuity and bonus are significant employment costs — both for provisioning and for cash planning
• Changes to the wage definition can affect PF, gratuity, bonus and other payroll taxes simultaneously
• Errors or late payments expose employers to interest penalties and disputes that are costly to resolve

2. Gratuity — Scope, Eligibility & Conceptual Calculation

2.1 What is Gratuity?

Gratuity is a statutory lump‑sum benefit paid by the employer to employees who complete a prescribed duration of service. It recognises long and continuous service and provides financial support at cessation of employment due to resignation, retirement, death, or disablement.

2.2 Eligibility Under the New Code

The most visible change is the widened inclusion of fixed‑term employees. Under the Labour Code 2025, fixed‑term employees who complete one year of service become eligible for a pro‑rata gratuity. For regular (permanent) employees the conventional threshold of longer service remains relevant in many employer policies, but organisations must check transitional notifications and any sectoral rules that the government may publish.

2.3 Unified Wage Definition & Its Effect

The Labour Code introduced a harmonised definition of “wages” that typically includes basic pay, dearness allowance (DA) and retaining allowance. Critically, where total allowances exceed 50% of the employee’s total remuneration, the excess is treated as if it were wages for the purpose of statutory calculations. Employers who structured large non‑statutory allowances to reduce statutory liabilities should rework pay structures to reflect the new baseline.

2.4 Standard Gratuity Formula (Conceptual)

The commonly applied formula remains:

Explanatory notes: 15 days’ wages are used as the multiplier (per statutory tradition) and 26 is the conventional average working days per month. “Last drawn wages” must be determined in light of the unified wage definition explained above.

2.5 Payment Timeline and Interest on Delayed Payment

Employers are required to deposit gratuity into the hands of the entitled employee within a defined statutory period — commonly within 30 days of the gratuity becoming payable. Late payments attract interest (a working estimate used in practice is c.10% per annum, though the exact rate can be notified by authorities). The interest is typically calculated for the period of delay on the unpaid amount.

3. Worked Examples — Step by Step

Below are practical examples showing how to calculate gratuity under the Labour Code 2025. Each example highlights the impact of the unified wage definition and the one‑year eligibility for fixed‑term staff.

Example 1 — Regular Employee (Completed 10 Years)

Example 2 — Fixed‑term Employee (Completed 1 Year)

Example 3 — Allowance Exceeds 50% (Impact on Gratuity)

4. Summary Table — Quick Reference

5. Bonus — Rules and Computation

The Payment of Bonus Act principles continue to apply in spirit, but with the unified wage definition and updated ceilings. The practical features to note:

• Employees drawing up to ₹21,000 per month (statutory ceiling as commonly used) remain eligible for statutory bonus subject to the accounting period rules and minimum service thresholds (commonly 30 days’ work in the accounting year)
• The computation base is the lower of actual wages and the statutory ceiling (or prescribed wage) and subject to minimum and maximum bonus rates

Illustration — Simple Bonus Calculation

6. Impact Analysis — Employer Perspective

Employers should focus on three operational consequences:

1. Accounting & Provisioning: Use revised wage base to compute accruals for gratuity and bonus. Reconcile prior-year provisions and adjust opening balances if transition rules require
2. Payroll Restructuring: Job offers, salary bands and allowance structures should be reviewed. In many cases restructuring allowances to increase basic pay may be simpler than dealing with add‑backs
3. Cash Flow & Budgeting: Earlier gratuity payments for fixed‑term workers mean employers may experience earlier cash outflows. Build this into monthly liquidity planning and consider phased provisioning

Sample Adjustment Checklist for Finance Teams

• Run an audit of all employee pay structures to find staff with allowances >50% of remuneration
• Recalculate gratuity and PF bases for the current year and adjust journal entries where necessary
• Update payroll software rules and employee master data to flag fixed‑term employees for pro‑rata gratuity

7. Impact Analysis — Employee Perspective

Employees overall benefit from a wider coverage and potentially a higher base for statutory benefits. Specific points:

• Fixed‑term workers gain access to pro‑rata gratuity after one year — this is especially meaningful for project‑based or contract staff
• Employees with large variable allowances will see part of those allowances count for gratuity if they exceed the 50% threshold
• Where employers restructure pay to increase basic pay, take‑home pay may change; employees should ask for a clear pay‑slip breakdown

8. Compliance Checklist (Practical)

Suggested Policy Clause — Gratuity (Sample)

9. Frequently Asked Questions (Expanded)

Q1: Does the one‑year rule for fixed‑term employees mean the five‑year rule for permanent staff is abolished?

A: No. The prominent change is the explicit grant of pro‑rata gratuity eligibility to fixed‑term employees after one year. Many employer policies for permanent staff will continue to follow established thresholds — however organisations should check for specific transitional or sectoral notifications.

Q2: How do I treat variable pay (sales commission, performance bonuses)?

A: Variable pay that falls under the umbrella of “allowances” should be carefully examined. If total allowances (including variable components that are regularly paid) exceed 50% of total remuneration, the excess will be treated as wages for the purpose of gratuity. Irregular or one‑off payments are usually not treated as part of the wage base, but consistent treatment is key — document your approach and seek specialist advice for complex cases.

Q3: My employer delayed a gratuity payment — how is interest calculated?

A: Interest is calculated on the unpaid amount for the period of delay. While a common working assumption is around 10% per annum, the statutory notification may specify the exact rate. If you face such a situation, seek timely legal or HR assistance to compute the correct interest amount and resolve the payment.

10. Illustrative Case Studies and Practical Tips

Case Study A — Mid‑sized IT Firm

An IT firm that used variable performance allowances to keep basic pay low found that 30% of its staff had allowances exceeding 50% of total pay. After re‑calculating gratuity liabilities, the firm adjusted its provisioning and amended new offer letters to increase basic pay and reduce variable allowances. This simplified statutory calculations and reduced compliance disputes.

Case Study B — Construction Contractor

A contractor employing many project‑specific workers on fixed‑term contracts discovered several ex‑workers were now eligible for pro‑rata gratuity. The contractor introduced a headcount‑based reserve and amended contract language to ensure clarity on termination and gratuity computation.

Practical Tips (Quick Wins)

• Run a one‑time payroll audit to find employees with allowances >50% and quantify the additional statutory exposure
• Communicate updated pay‑slip format clearly to employees, showing the components that form “wages”
• Negotiate transitional arrangements with labour advisors if your business model relies heavily on fixed‑term hires

11. Accounting & Disclosure (Brief)

From an accounting perspective, ensure that gratuity provisioning reflects the expected cash outflows under the new rules. If the company follows actuarial valuation for long‑term employee benefits, update actuarial assumptions to reflect the new eligibility and wage base. Disclose any material changes in accounting policies and their effect on comparative figures in the notes to financial statements.

12. Appendix — Calculation Summary Table

13. Common Pitfalls & How to Avoid Them

• Not updating employee data: Label and tag fixed‑term employees correctly in HRIS to avoid missing gratuity accruals
• Ignoring transition rules: Check government notifications for transitional directions — these can affect when changes must be implemented
• Poor documentation: Keep clear records of salary components and the rationale for pay structuring to defend against disputes

14. Final Checklist Before Implementation

1. Map every employee to a contract type and confirm continuous service dates
2. Run a pay‑component analysis to identify add‑back exposure (allowances >50%)
3. Update payroll engines, test multiple runs, and validate outputs with sample employees
4. Publish an employee communication and updated pay‑slip template
5. Engage auditors/actuaries if material changes affect financial statements

15. Conclusion

The Labour Code 2025 brings clarity and broader coverage for gratuity and bonus, particularly benefitting fixed‑term employees. For CMAs and payroll professionals, the priority is to convert legal change into operational actions: update employee records, recalculate provisions, alter payroll rules, and communicate clearly. Timely compliance will reduce disputes and ensure accurate financial reporting.