Understanding the Implementation of the Labor Code 2020: Criteria for Gratuity Payment and ESI Salary Calculation

I have two questions related to the implementation of the Labor Code 2020.

1. What is the criteria for the number of continuous service years for the purpose of gratuity payment?
2. What is the current ESI salary?

Consider the following salary breakdown for an employee:

- Basic: 6500.00
- HRA: 3250.00
- Conveyance: 1625.00
- Special Allowance: 1625.00
- Fixed Gross: 13000.00
- Incentive: 56479.00
- Gross: 69479.00

In this case, will the employee be eligible for ESI coverage? If so, how would the ESI be calculated? I'm a bit confused following the amendment effective from November 21, 2025.

Subhabrata Dasgupta

The Labor Code 2020 has indeed brought some changes to the criteria for gratuity payment and the calculation of ESI. Let's break it down:

Gratuity Payment Criteria
The gratuity is a benefit provided to an employee for his/her services rendered to the organization. As per the Payment of Gratuity Act, 1972, an employee is eligible for gratuity if he/she has completed five years of continuous service in the same organization. The Labor Code 2020 has not made any changes to this criterion.

ESI Salary and Coverage
The Employees' State Insurance (ESI) is a self-financing social security and health insurance scheme for Indian workers. The ESI Act, 1948, applies to organizations with 10 or more employees. The wage limit for coverage under the Act is Rs. 21,000 per month. In your case, the gross salary of the employee exceeds this limit, so he/she would not be eligible for ESI coverage.

ESI Calculation
If an employee is covered under ESI, the contribution is 4.75% from the employer and 1.75% from the employee, calculated on the gross salary. However, in your case, as the employee is not eligible for ESI coverage, there will be no ESI calculation.

Additional Tips
It's important to regularly review the salary structures and benefits of your employees to ensure compliance with the latest labor laws. Non-compliance can lead to penalties and legal issues.

What to Avoid
Avoid making assumptions about the applicability of labor laws based on hearsay or outdated information. Always refer to the latest amendments and notifications from the government.

I hope this clarifies your doubts. If you have any more questions, feel free to ask.

Dear Subhabrata,

For your understanding, I have detailed the implementation criteria for gratuity payment and ESI salary calculation under the Labor Code 2020.

1) Gratuity Eligibility:

- Fixed-term/Contract employees: These employees are eligible for gratuity after completing 1 year of service, provided the contract has a specified end date.

- Permanent employees: They become eligible for gratuity after completing 5 years of continuous service.

Here is an example for clarity:

Suppose an employee is on a fixed-term contract and completes 1 year, then the employer is obliged to pay gratuity. However, if the employee is permanent, gratuity is payable only after five years of service.

Employee Type Minimum Service for Gratuity
Fixed-term/Contract 1 year
Permanent 5 years

2) ESI (Employee State Insurance) Eligibility:

Under the new Labor Codes, an employee is eligible if the monthly wages are less than or equal to ₹21,000. The employer\'s contribution is 3.25% of total wages, while the employee\'s contribution is 0.75% of total wages.

Here\'s a practical example:

Suppose Basic Salary is ₹6,500, and DA is ₹0. The total wages then amount to ₹6,500.

Eligibility Check:

₹6,500 ≤ ₹21,000 → Yes, the employee is eligible for ESI.

The Employee\'s Contribution would be calculated as follows: 6500 x 0.75% = 6500 x 0.0075 = ₹48.75.

Below is a clear summary:

Component Amount (₹)
Total Wages 6,500
ESI Employer (3.25%) 211.25
ESI Employee (0.75%) 48.75

Thanks and regards,
Y. Satish

There is no change in the qualifying salary or conditions for coverage under ESi or PF under the new Code. All the provisions relating to coverage are still available in the Code. Same is the case with gratuity also. For entitlement, one should have completed 5 years' service. One thing is that if there is any fixed term contract employee, and his service is not renewed on completion of the period for which he was appointed, then he will be entitled to get gratuity. This applies only to those who were appointed for a fixed term. This new provision does not apply to those who voluntarily leave.