Managing gratuity liability for a foreign subsidiary has become more complex since India’s four Labour Codes took effect on 21 November 2025. Gratuity now sits under the Code on Social Security, 2020, and the rules have changed for fixed-term staff, wage definitions and transferred employees.
This matters to foreign parent companies hiring in India, MNCs moving staff between group entities, global startups building Indian teams, and NRIs or overseas investors who own Indian operations. Gratuity is a statutory, long-tail liability. If it is ignored at the time of hiring or transfer, it shows up later as audit qualifications, employee disputes and funding gaps.
Whether you are planning Company Formation In India or already run a Company Setup in India, this guide explains who is covered, how the liability is calculated, and how to manage it. Startup Solicitors LLP regularly advises foreign-owned entities on these workforce structuring questions.
Understanding Gratuity Liability in the Indian Context
Gratuity is a lump-sum statutory benefit paid by an employer to an employee in recognition of long service. It is an accrued liability: it builds up every year, whether or not the employee ever leaves.
“Foreign subsidiary” is used in two ways in practice:
- An Indian subsidiary of a foreign parent. This is the most common case. The Indian entity is the employer and bears the gratuity liability.
- An overseas subsidiary of an Indian group. Indian employees are transferred or seconded abroad. The question here is whether their Indian service continues to count.
In both cases, the central question is continuity of service and who owns the accrued liability. Global employers should note that Indian gratuity is an employer-borne cost with no employee contribution, unlike many overseas pension systems.
Legal Framework and Regulations in India
- Code on Social Security, 2020 (Section 53): Gratuity is payable on retirement, resignation, superannuation, death or disablement, generally after five years of continuous service. The five-year condition is waived on death or disablement.
- Fixed-term employees: They become eligible for pro-rata gratuity after one year of continuous service. This is a key change for project-based and contract hires in subsidiaries.
- Applicability: It covers establishments meeting the notified employee threshold, historically 10 or more employees.
- Formula: Last drawn wages × 15/26 × completed years of service. The Code’s wage definition generally counts basic pay, dearness allowance and retaining allowance, with excluded components capped at 50% of total remuneration. This can raise the gratuity base for employers who keep basic pay low.
- Ceiling: The existing tax-linked ceiling of ₹20 lakh remains the working benchmark, subject to government notification.
- Payment timeline: Within 30 days of becoming payable.
- Tax: The Income-tax Act, 2025 came into force from 1 April 2026 and continues the exemption framework for gratuity. Check the current position on the Income Tax Department portal.
- Corporate records: Employee-benefit provisions affect financial statements filed with the Ministry of Corporate Affairs, so Ind AS 19 or AS 15 actuarial valuation applies.
Foreign companies should also review FEMA and RBI compliance when parent-to-subsidiary cost recharges fund these obligations.
Step-by-Step Process to Manage Gratuity Liability
- Map the employee population. Identify who joins the Indian subsidiary, who transfers from another entity, and who is fixed-term. If you are still choosing a structure, see private limited company incorporation or business setup in India for foreign nationals.
- Confirm coverage. Check the headcount threshold and the Code’s applicability to your establishment.
- Decide the continuity-of-service position in writing. If prior service with a group company is to count, record it in the appointment or transfer letter.
- Compute the liability using the 15/26 formula on the Code’s wage definition, and restructure salary components accordingly.
- Obtain an actuarial valuation and book the provision.
- Fund the liability. Consider a gratuity trust or a group gratuity insurance scheme, and budget for the 30-day payment window.
- Handle nominations and records. Collect employee nominations and keep service records current.
- Manage exits. Process payment within 30 days and report TDS correctly.
Considerations by profile:
| Profile | Key consideration |
|---|---|
| Indian residents | Service counts from the date of joining the Indian entity unless continuity is agreed |
| NRIs | Gratuity is payable in India on exit. Remitting abroad needs bank documentation and tax compliance |
| Foreign companies | The Indian subsidiary, not the parent, is the statutory employer |
| Global startups | Fixed-term hires now qualify after one year, so budget early |
| Overseas investors | Unfunded gratuity affects valuation and due diligence |
Key Challenges and Practical Issues
- Assuming continuity automatically carries over. Moving between group entities does not by default merge service. A transfer without a written decision creates disputes later.
- Ignoring the new wage definition. Salary structures with a very low basic pay now carry understated provisions.
- Treating fixed-term staff as outside the scheme. Pro-rata eligibility after one year is a compliance risk for contract-heavy teams.
- Unfunded provisions. A large liability that is booked but not funded creates a cash-flow shock at exit.
- Poor documentation. Missing nominations, unclear transfer letters and gaps in service records are the most common sources of litigation.
- Secondment ambiguity. Employees seconded abroad often lack clarity on which entity bears gratuity during the posting.
Strategic Insights and Expert Recommendations
- Decide continuity at the deal stage, not at exit. For acquisitions and group transfers, price the accrued gratuity into the transaction.
- Redesign the CTC structure. Review basic pay against the 50% wage rule before the next appraisal cycle, and align payroll through payroll management.
- Fund early. A gratuity trust or insurance-backed scheme smooths cash flow and improves audit comfort.
- Use a transfer agreement for cross-border moves. Specify who carries the liability, how it is recharged, and how the transfer pricing treatment is supported. See transfer pricing compliance.
- Align HR policy with statute. Employment contracts must not offer less than the statutory minimum. Review them as part of corporate governance compliance.
- Audit annually. Reconcile valuation, provision and payroll through accounting and internal auditing, and keep taxation and compliance services aligned with the latest rules.
If employees from abroad are joining, coordinate immigration and employment terms through employment visa applications. For wider advisory support, see corporate law and legal advisory.
Conclusion
Handling gratuity liability for a foreign subsidiary after the 2026 Labour Code changes comes down to four things: clarity on continuity of service, a correct wage base, proper funding and clean documentation. Companies that settle these at hiring or transfer avoid disputes and protect valuation, whether they are still planning Company Formation In India or running an established Company Setup in India.
If you are structuring an Indian subsidiary or reviewing employee benefit obligations, you can reach the team at Startup Solicitors LLP for a structured review of your position.
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This article is for general information and is not legal advice. Notified rules and thresholds may change, so verify current provisions before acting.
FAQs
1. Is gratuity payable by a foreign company’s Indian subsidiary?
Yes. The Indian subsidiary is a separate legal entity and the statutory employer. If it meets the applicable employee threshold under the Code on Social Security, 2020, it must provide gratuity to eligible employees regardless of the foreign parent’s own policies.
2. How is gratuity calculated after the 2026 Labour Code changes?
Gratuity equals last drawn wages multiplied by 15/26 and by completed years of service. Under the Code, “wages” generally includes basic pay, dearness allowance and retaining allowance, with excluded components capped at 50% of total remuneration.
3. Are fixed-term employees entitled to gratuity?
Yes. Under the Code on Social Security, fixed-term employees become eligible for pro-rata gratuity after completing one year of continuous service, instead of the usual five-year requirement. Employers should budget for this in contract and project-based hiring.
4. Does service with a group company count when an employee transfers?
Not automatically. Service continuity depends on the transfer terms, consent and the legal structure. Employers should record in writing whether prior service is recognised and which entity bears the accrued gratuity liability.
5. Can an NRI or expatriate employee receive gratuity abroad?
Gratuity is payable in India on exit. Remittance abroad is possible through authorised banking channels, subject to tax deduction and FEMA documentation. Employers should maintain service records, nominations and payment proof for audit.