Introduction of The Code on Social Security, 2020
Section 1: Introduction
The Government of India has announced that the four Labour Codes – The Code on Wages, 2019, The Industrial Relations Code, 2020, The Code on Social Security, 2020, and The Occupational Safety, Health and Working Conditions Code, 2020 are made effective from 21st November 2025.
The aim behind this decision is to bring transparency, better wages, safety, social security, and enhanced welfare of the working force of the country.
The Code amends and consolidates laws relating to social security (like EPF, ESI, gratuity, maternity benefit, etc.) with the aim of extending benefits beyond the traditional organised sector to unorganised workers, gig workers, platform workers, and self‑employed persons.
In this article, we cover the key changes brought in by The Code on Social Security, 2020 and its impact on employee benefit valuations and gratuity valuation services. Businesses must now revisit their existing policies, especially those related to gratuity valuation, to ensure compliance.
Section 2: Key Changes Related to Gratuity Computation
1. Fixed Term Employment – Vesting Period Not to Apply
Definition given in the Code Section 2:
“Fixed term employment” means the engagement of an employee on the basis of a written contract of employment for a fixed period.
Provided that –
(a) His hours of work, wages, allowances and other benefits shall not be less than that of a permanent employee doing the same work or work of a similar nature; and
(b) He shall be eligible for all benefits, under any law for the time being in force, available to a permanent employee proportionately according to the period of service rendered by him even if his period of employment does not extend to the required qualifying period of employment.
Earlier, all employees were eligible for gratuity after completion of five years. Now with this new code, in case of Fixed Term Employment, gratuity pay-outs will be made upon expiry of the fixed term, irrespective of whether five years have been completed or not.
This is likely to increase gratuity liability for companies that offer fixed term employment. As a result, the need for accurate gratuity valuation services becomes even more critical for financial reporting and compliance.
The increase in liability because of this change shall be treated as Past Service Cost and charged to the Income Statement.
2. Working Journalists and Other Newspaper Employees
The gratuity vesting criteria for Working Journalists and Other Newspaper Employees (Condition of Service) has been changed from five years to three years. This change will affect how gratuity valuation is carried out for media houses and related industries.
3. Change in the Definition of Wages
One of the most significant changes is the new definition of wages, which directly impacts salary structure and the calculation of social security benefits such as gratuity.
As per the Code on Wages, 2019:
“Wages” means all remuneration whether by way of salary, allowances, or otherwise, expressed in terms of money or capable of being so expressed, and includes:
(i) Basic Pay
(ii) Dearness Allowance
(iii) Retaining Allowance, if any
However, it excludes:
- Bonuses not part of the employment contract
- House accommodation or other similar perquisites
- Employer contributions to provident or pension funds
- Conveyance allowance
- HRA
- Overtime and commissions
- Gratuity payable at termination
- Retrenchment compensation or other retirement benefits
Furthermore, if the excluded components (a) to (i) exceed 50% of the total remuneration, the excess will be added back to the wages for calculation purposes.
This essentially mandates restructuring of salary components to meet the 50% wages rule. Companies paying less than 50% of the salary as Basic Pay and DA are likely to see a rise in gratuity and leave encashment liabilities. To handle this change effectively, timely and accurate gratuity valuation is essential.
Firms offering gratuity valuation services can help businesses remain compliant and financially prepared for the increased liabilities under the new wage structure.
Disclaimer
This above note has been furnished solely for information and must not be reproduced or redistributed. This material is for the information of the recipient, and we are not soliciting any action based upon it. Neither Mithras Consultants nor any person connected with it accepts any liability arising from the use of this document. The above note is not providing any recommendations. The information should not be relied upon as advice on your specific circumstances.
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