Gratuity Under the New Labour Codes (2026)

On 21 November 2025, India’s four new labour codes came into force. For gratuity, the Code on Social Security, 2020 replaced the Payment of Gratuity Act, 1972. The formula is the same, but two changes can put noticeably more money in your hands when you leave a job.

What stayed the same

• The formula: Gratuity = last drawn monthly wages × 15 × years of service ÷ 26.
• Wages means basic pay plus dearness allowance.
• Permanent employees still need 5 years of continuous service to qualify (not required on death or disability).
• A final part-year of more than 6 months counts as a full year.
• Tax: tax-free up to ₹20 lakh over your career for private-sector employees; fully tax-free for government employees.

Change 1: fixed-term employees qualify after 1 year

Fixed-term (contract) employees used to need 5 years like everyone else. They now qualify after just 1 year of service. Someone on a one-year contract earning ₹50,000 a month in basic pay would get:

₹50,000 × 15 × 1 ÷ 26 = ₹28,846

Change 2: wages must be at least half of pay

Under the codes, “wages” must be at least 50% of total remuneration. If allowances make up more than half your pay, the excess is added back to wages for calculating gratuity and other benefits. Many employers are raising basic pay to 50% of CTC, and gratuity rises with it.

For someone with ₹1 lakh a month in total pay and 10 years of service:

Basic pay	Gratuity after 10 years
₹40,000 (40% of pay)	₹2,30,769
₹50,000 (50% of pay)	₹2,88,462

That is about ₹58,000 more, just from the change in how wages are defined. The flip side: higher basic pay also means higher PF deductions, so your monthly take-home pay may dip slightly. Check yours with the salary calculator.

Calculate your gratuity

Worked examples

Last monthly wages	Service	Gratuity
₹50,000	10 years	₹2,88,462
₹50,000	10 years 7 months (counts as 11)	₹3,17,308
₹80,000	20 years	₹9,23,077

When and how you get paid

• Gratuity is paid when you resign, retire, are laid off, or on death or disability.
• Your employer must pay within 30 days of it becoming due.
• If your employer delays or refuses, you can approach the controlling authority under the labour department of your state.

If your employer is not covered

Organisations with fewer than 10 employees are generally not covered. If they pay gratuity voluntarily, it is often calculated as half a month’s wages for each completed year (wages × 15 × years ÷ 30).

Key takeaways

• Contract workers finally get gratuity after 1 year.
• If your basic pay goes up to meet the 50% rule, your gratuity (and PF) go up too.
• Plan it alongside your other retirement money: EPF, NPS and PPF.