Gratuity in India: why funded beats book-entry (and what changed for fixed-term staff)

Gratuity is the Indian statutory benefit that US employers most often misunderstand, because there is no clean equivalent to compare it to. It is not severance, it is not a bonus, and it is not discretionary.

It is a statutory lump sum payable on qualifying exit under the Payment of Gratuity Act. It accrues from an employee's first day. And it is paid out years later — which is precisely what makes it easy to get wrong.

The shape of the obligation

Two features define it, and they pull in opposite directions.

It accrues continuously. Roughly 4.81% of wages, every month, from day one. On a ₹50,000 wage base that is ₹2,405 a month, about ₹28,860 a year, quietly building.

It is paid rarely. Nothing leaves the business until someone exits with qualifying service. A company can employ people for years and never write a gratuity cheque.

An obligation that accrues monthly and pays out infrequently is the textbook profile of a liability that gets under-provisioned. There is no monthly payment to force the issue, and no deadline that fails if you ignore it.

Book entry versus funded

This is where employers diverge, and the distinction is worth being precise about because both approaches are legal.

A book entry records the accrued liability in your accounts. The number is correct. The money is still working capital. When an employee with eight years of service resigns, the payment comes out of whatever cash is available that month.

A funded arrangement actually sets the money aside — in our case through an approved Group Gratuity Fund structure with a regulated insurer. The liability is funded and ring-fenced. The cash is not available to be spent on something else, which is the entire point.

• Accrual recordedThe liability appears in the accountsBoth
• Money set asideCash actually reserved against the liabilityFunded only
• Held externallyWith a regulated insurer, outside the employer's booksFunded only
• Survives the employerEmployee dues protected independentlyFunded only
• Costs nothing todayNo cash leaves the business nowBook entry

The last line is the honest one. Book-entry provisioning is cheaper right now. That is why it is common.

Why we fund it

Our reason is specific to the model we operate, and it is worth spelling out rather than presenting funding as a general virtue.

We are an Employer of Record. Your team in India is legally employed by us. That means their gratuity is our liability, and their exposure to us is not something they chose or can assess.

If those dues sat as a book entry on our balance sheet, an employee's long-term benefit would depend on our financial position at the moment they happened to resign. Funding it through a regulated insurer removes that dependency. The money exists, and it exists somewhere other than with us.

The same logic protects you. Employee dues — Provident Fund balances with government bodies, funded gratuity with the insurer — sit outside our books entirely. If something happened to us, those entitlements are not part of the problem to be solved. Your protection is contractual as well: the agreement gives you a transition right, and employment records, payroll registers and statutory filings are shared with you monthly, so you always hold a current copy rather than needing to request one at the worst possible moment.

What changed under the new Labour Codes

Two changes, both of which increase the number.

The wage base grew. Gratuity is computed on wages, and the uniform wage definition requires Basic + DA to be at least 50% of total remuneration. On a structure that previously ran a small Basic, the accrual rises proportionally. Gratuity liabilities have risen industry-wide for this reason.

Fixed-term staff qualify after one year. Previously the qualifying period was five years. Under the Code on Social Security, fixed-term employees now earn gratuity after one year of service, with benefits at par with permanent staff.

That second change deserves emphasis, because it removes a strategy rather than adjusting a number. Fixed-term contracts were sometimes used on the assumption that shorter engagements would not reach the five-year threshold. They now reach the one-year threshold routinely. A fixed-term contract in India changes the duration of employment, not the entitlements attached to it.

Where clients want fixed-term contracts, we structure them correctly and provision these dues from month one.

What to check

If you employ in India through your own entity:

• Is gratuity provisioned for every eligible employee, or only for those who look likely to stay?
• Is the accrual computed on the post-Codes wage base?
• Are fixed-term employees being provisioned from year one?
• Is the provision funded, or recorded?

If the last answer is "recorded", that is a decision rather than an error — but it should be a decision someone made deliberately, not a default nobody examined.

For teams employed through us, all four are handled as a matter of course. Our HR and statutory compliance service sets out what that covers, and the Labour Codes guide covers the other changes that landed alongside this one.

• gratuity rules India 2025
• Payment of Gratuity Act
• fixed-term
• benefits