Social Security Code, 2020 :
Impact on Gratuity Liability
What is Social Security Code,2020?
In this blog, we discuss the changes in Social Security Code, 2020 and impact on Gratuity Liability from an actuarial valuation perspective.
The Social Security Code, 2020 consolidates the following 9 “enactments”:
- The Employee’s Compensation Act, 1923
- The Employees’ State Insurance Act, 1948
- The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
- The Employment Exchanges (Compulsory Notification of Vacancies) Act, 1959
- The Maternity Benefit Act, 1961
- The Payment of Gratuity Act, 1972
- The Cine-Workers Welfare Fund Act, 1981
- The Building and Other Construction Workers’ Welfare Cess Act, 1996
- The Unorganised Workers’ Social Security Act, 2008.
Social Security Code received presidential assent in 2020, and most of the provisions were implemented on 21st November 2025.
The new Social Security Code has different chapters for major provisions of the “enactments” it replaces, and borrows most of the content from its respective predecessor.
For instance, specific provisions related to Gratuity payments are covered under “Chapter V” of the Social Security Code, 2020, and this chapter borrows most of its content from the erstwhile Payment of Gratuity Act, 1972.
Is there any difference in Gratuity as per Social Security Code vs Payment of Gratuity Act?
The gratuity formula under Social Security Code 2020 remains same as it was under Payment of Gratuity Act, 1972. There are other similarities too in various other provisions.
As such, it is possible that there could be no impact on Gratuity liability for a company due to the implementation of the new Social Security Code.
However, there are a few changes in the new Social Security Code that might impact the gratuity payment amounts, and also the eligibility of those payments. These changes would in turn flow to the actuarial models and impact the gratuity liability calculated by the actuaries.
Further, we expect the new Social Security Code’s impact on Gratuity Liability to remain the same or increase, depending on the specifics of the company, under both AS15 or IndAS19 accounting standards. However, we do not foresee any circumstance where the Gratuity liability could decrease, ceteris paribus.
We have covered the key differences in new Social Security Code that could impact the actuarial valuation of gratuity liability in the following sections:
- Definition of “wages” (vs Basic+DA)
- Vesting period (for Fixed-term employment of fixed-term contract employees and Journalists)
- Trigger events for gratuity payments (2 new clauses)
- Pro-rata basis for specified events (new clause in gratuity formula)
Major change 1:
Definition of "wages"
As per Social Security Code, the total “remuneration” or CTC can be split into 3 parts:
Part 1
(a) Basic pay
(b) Dearness allowance (DA); and
(c) retaining allowance
This part is comparable to salary definition used earlier for actuarial calculation of gratuity since (b) and (c) are generally 0 for most of the employers in private sector.
Part 2
(a) Bonus (see FAQ for more details)
(b) & (f) Rent-free accommodation & HRA
(c) Employer’s contribution to pension or provident fund, and the interest which may have accrued thereon; (discussed further in FAQ)
(d) Conveyance allowance
(e) any sum paid to defray special expenses
(g) Court awards
(h) any overtime allowance
(i) any commission payable to the employee
Part 3
(j) any gratuity payable on the termination of employment;
(k) any retrenchment compensation or other retirement benefit payable to the employee or any ex gratia payment made to him on the termination of employment.
This part is generally payable on exit.
As per the new code, “wages” refers to the total of Part 1 components, i.e.,Basic + DA + Retaining Allowance.
However, if the total of Part 2 above is more than 50% of the total remuneration or CTC, then “wages” also includes the % component of Part 2 that exceeds 50%. (likely to have the largest impact on actuarial valuation of gratuity liability)
Example of "wages" calculation
In this example, in Scenarios 1 & 2, “wages” = Part 1, since Part 2 <=50% of the remuneration.
However, in Scenario 3, the total of part 2 components is 60% of total remuneration. Here, Part 2 has 10% extra component (i.e., 60%-50%). Thus, 10% (₹1,000) from Part 2 is added to existing 40% (₹4,000) from Part 1 to calculate wages for gratuity payment calculation (₹4000+₹1000).
No such adjustment is needed in the other 2 scenarios.
For this example, we have assumed Part 3 components = 0 as a simplification. However, there may be Part 3 components that may be applicable.
We understand that every company may have several different components in their salary structure. And it may be confusing to provide total wages data for actuarial valuation of gratuity liability. If you are not sure about the data, please contact us by clicking here
Major change 2:
Vesting period
In India, the “vesting period for gratuity” refers to years of continuous service by an employee. The vesting period remains same for most of the employees, i.e.,
5 years upon resignation or retirement, and
NIL in case of death or disablement.
However, there are 2 categories of employees where the vesting period may differ under specific conditions:
Exception 1: Fixed-term contract workers
The code defines fixed term contract workers or “fixed term employment” as “the engagement of an employee on the basis of a written contract of employment for a fixed period”. (discussed further in FAQ)
The code explicitly excludes 5 years vesting period for employees under “fixed-term employment” where the cause of exit of employee is the expiry of such contract.
Exception 2:
Journalists
For journalists, the vesting period is 3 years instead of 5 years.
where, journalist is defined as a working journalist as per clause (f) of section 2 of the Working Journalists and Other Newspaper Employees (Condition of Service) and Miscellaneous Provisions Act, 1955.
Major Change 3: Trigger events
The Social Security Code, 2020 introduces 2 new clauses where Gratuity becomes payable:
- Termination of the contract period under fixed term employment (read the example in next section)
- Happening of any such event as may be notified by the Central Government
- Since the event is not defined yet, we have not allowed for this clause in our models.
- However, by introducing this clause, the government may specify in future any event to pay Gratuity, and we will allow for the same in our models.
Major change 4:
Pro-rata basis
Further, in the clause where the gratuity formula is defined, the code also specifies that in the case of expiry of fixed term employment or a deceased employee, “the employer shall pay gratuity on pro rata basis”. While there may be further clarification on this clause in future, the current interpretation of this clause has a direct impact on the gratuity formula / calculation.
We have explained the above changes for “fixed-term employment” with help of an example below:
Monthly wages as per the new code = ₹10,000
Duration of fixed-term contract = 21 months (or 1.75 years).
Thus, the gratuity payable for Mr. X upon expiry of 21 months
= Monthly wages x 15/26 x Past service years (rounded off) x Pro rata factor
= 10,000 x 15/26 x 2 years x 21/24
= 10,000 x 15/26 x 1.75
= ₹10,096
In the above example, the factor of 21/24 is a direct implication of the “pro rata” clause.
In the above example, the gratuity payment would have been 0 under Payment of Gratuity Act 1972, since the employee had not completed 5 years of continuous service.
Impact on Actuarial Valuation of Gratuity Liability
The new rules of Social Security Code, 2020 is likely to have a significant impact on the balance sheet of a few companies who were earlier managing their social security contributions by keeping the basic component of the salary as low as possible. However, most of our clients had already restructured their salary structure to keep the basic component at 50% of the CTC. And for such companies, the impact of the new rules on their gratuity liability provision is likely to be negligible.
P&L impact
The increase in Gratuity Liability due to the implementation of the new regulation will vary for each company. However, in most cases, the impact is likely to be shown as Past Service Cost calculated on the date of implementation of the new rules, i.e., 21st Nov 2025. It is important to calculate this Past Service Cost at the exact date and not overstate the impact on P&L by mixing it up with the annual salary increment component. Any movement due to “plan experience” (actual vs expected, for instance actual salary increments being higher than expected assumption) should be captured as OCI (for IndAS19).
Companies should check with their actuaries that the actuarial models used for calculating gratuity liability are robust enough to be able to split the PSC & OCI impact accurately.
Impact on Data Collection & Actuarial models
The new rules impact the calculations within actuarial models. We have updated our models to comply with the new rules already.
We have also simplified the data collection process to ensure that our clients can focus on their core business, while still remaining compliant with the new rules (from actuarial reporting perspective).
FAQs
- Should I include Bonus in “wages” calculation?
- My company hires interns. Are they eligible for gratuity under “fixed-term employment”?
- Do I need to follow rules as per Central Government or State Government?
- The new code includes interest on employers contribution to PF in CTC. Will it impact gratuity liability?
- Why is the impact of the new Gratuity rules shown as Past Service Cost in the actuarial reports?
- I have less than 10 employees. Is Social Security Code applicable to me?
As per our understanding of the changes in Social Security Code, the variable component of bonus should not be included in the calculation of remuneration. However, if there is any fixed component included as bonus then that should be included in remuneration. This understanding aligns with the wider industry view, and is also derived from the interpretation of the following clauses:
“wages” means all remuneration…. which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed…”
In most cases, the variable component of the bonus is discretionary. In other words, the variable component of bonus can be 0 while still meeting the terms of the employment. Indeed, in most cases, the variable performance-based bonus is not payable to an exit employee. Thus, we may conclude that variable component of bonus (that is not fixed / guaranteed) may be excluded.
Having said the above, we are expecting more clarification on wages definition soon.
Social security code defines “fixed term employment” as the engagement of an employee on the basis of a written contract of employment for a fixed period. Interestingly, the new code does not provide any minimum or maximum limits to the period. So, until further clarification is received, it may be assumed that interns are eligible for gratuity.
However, as per the draft rules, if the interns are hired for less than 1 year, then it is possible that we may not need to pay Gratuity to them, (please refer to page 141 of the draft rules by clicking here) which says:
“Provided further that an employee on fixed term employment shall be eligible for gratuity, if he renders service under the contract for a period of one year and he shall be paid gratuity at the rate of fifteen days’ wages, based on the rate of wages last drawn by him, for every completed year of service or part thereof in excess of six months.”
Further it must be noted that any person engaged as an apprentice under the Apprentices Act, 1961 does not qualify as an employee and hence not eligible for gratuity benefit.
Please contact us directly for any further queries on this important topic.
Depends. For private sector, if you have branches in more than 1 state, then Central government rules apply. Otherwise, respective state government rules may apply.
For more information, please refer to the “Definition” of “appropriate government” provided in Page 3 of the Social Security Code 2020.
The short answer is it shouldn’t. However, it is a tricky one and we have explained the complication below.
The new Social Security Code specifies that following should be included as part of remuneration but not as wages:
“(c) include any contribution paid by the employer to any pension or provident fund, and the interest which may have accrued thereon”
This could be interpreted to imply that the interest earned on employer’s contribution to PF must be included as part of CTC. However, this could also be referring to the interest accrued on self-managed PF funds and/or the interest on delayed contributions (although unlikely).
The interest earned on PF fund managed by EPFO can be viewed as outside the purview of the “wages” definition because it is not related to “employment or of work done in such employment”. Also, this interest is not “paid by the employer”, so it directly contradicts the clause (c).
Basically, the interest component of employer’s contribution to PF, if included as remuneration, may impact the 50% threshold of the “Part 2” components and thus may inflate the wages used for calculation of gratuity.
However, we will await further clarification from the government on this and update our understanding accordingly.
IndAS19 accounting standard states that “Past service cost is the change in the DBO resulting from a plan amendment..”. Further, the standard also specifies to exclude “effect of differences between actual and previously assumed salary increases on the obligation to pay benefits for service in prior years”
Since the changes due to Social Security Code results in plan amendments impacting the cost accrued in prior years, it must be booked as Past Service Cost. However, as we have mentioned above already, the impact of actual vs expected salary escalation should be split out while calculating PSC impact.
Social Security Code defines “employer” as “a person who employs, whether directly or through any person, or on his behalf, or on behalf of any person, one or more employees in his establishment…”.
So in essence if you have even 1 employee the Social Security Code applies. However, “The First Schedule” of the Social Security Code (Page 99) specifies “Applicability” of specific “Chapters”. As per this Schedule, Gratuity is still applicable for employers with 10 or more employees.
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Disclaimer: The views presented above are for educational purposes only. It should not be considered as actuarial and/or legal advice. Also, we regularly update our modelling approach and this blog may or may not be updated to reflect our current/latest views.