Gratuity calculation has not changed the way most people believe — but confusion around “wages” and early eligibility is already leading to payroll mistakes and false expectations.
The formula remains the same.
The law is not yet fully enforced.
And the widely circulated “1-year gratuity for everyone” claim is incorrect.
What has changed is the proposed base for calculation under the new labour codes, and that single shift is being misunderstood across HR, payroll, and employee discussions.
This article clears the confusion — fact by fact, without assumptions.
Gratuity Under New Labour Codes — At a Glance
✔ Formula: Unchanged
✔ Calculation Base: Proposed shift from Basic + DA → Wages
✔ Permanent Employees: No change (5 years rule continues)
✔ Contract Employees: Pro-rata gratuity proposed after contract completion
✔ 1-Year Rule: Not universal, not notified, not retrospective
✔ Current Status: Applicable only after official notification
If someone told you “gratuity rules have already changed for everyone” — that information is incomplete.
Misconception 1: “The Gratuity Formula Has Changed”
Reality: The Formula Remains Exactly the Same
There is no change in the gratuity calculation formula.
Gratuity Formula (unchanged):
Gratuity = (Last drawn amount ÷ 26) × 15 × Number of completed years of service
What changes is how “last drawn amount” is defined under the proposed wage framework.
Misconception 2: “Gratuity Is Still Calculated on Basic + DA”
Reality: The Base Shifts to “Wages” (Once Implemented)
Earlier:
- Gratuity was calculated on Basic Pay + Dearness Allowance (DA)
Under the proposed labour codes:
- Gratuity will be calculated on “Wages”, as defined under the Code on Wages
What Does “Wages” Mean?
In simple terms:
- Includes Basic + DA + Retaining Allowance (if any)
- Allowances are excluded only up to 50% of total remuneration
- Any allowance portion beyond 50% is added back into wages
This is the same wage definition already discussed for PF and ESI, which is why confusion has spread rapidly.
Does This Increase the Gratuity Amount?
In many real-world cases, yes.
If an employee’s salary structure earlier had:
- Low Basic
- High allowances
Then shifting the base to wages increases the amount used for gratuity calculation.
This — not a formula change — is the real financial impact.
Misconception 3: “Everyone Will Get Gratuity After 1 Year”
Reality: No Change for Permanent Employees
- Gratuity eligibility remains 5 years of continuous service
- There is no approved proposal to reduce this requirement
Any claim stating otherwise is incorrect.
Misconception 4: “1-Year Gratuity Is Already Applicable to Contract Employees”
Reality: It Is a Proposed Provision, With Conditions
As per draft provisions:
- Fixed-term / contract employees may become eligible for gratuity
- On a pro-rata basis
- After completion of the contract period, even if it is one year
However, all conditions must be met:
- Employment must be fixed-term or contract based
- Contract period must be completed
- Employee must join on or after the notified effective date
- Labour codes must be officially enforced
📌 The commonly mentioned date (21 November 2025) is not officially notified.
Treat it as tentative, not legally binding.
Practical Example: Gratuity Calculation Using Wages
Assume:
- Last drawn wages: ₹30,000
- Years of service: 5
Gratuity = 30,000 ÷ 26 × 15 × 5
≈ ₹86,538
The calculation logic remains exactly the same — only the base changes.
Calculate Your Gratuity Amount
Use our gratuity calculator to estimate your payable gratuity based on the latest calculation method and proposed wage definition under the new labour codes.
Open Gratuity CalculatorNote: Final applicability depends on official notification of labour codes.
Gratuity Calculator (Based on Proposed Wage Definition)
Use this calculator to understand the calculation logic.
Actual applicability depends on official notification of the labour codes.
How to use:
- Enter last drawn wages (not CTC)
- Enter completed years of service
- Calculator uses the statutory formula
Why this calculator does not hurt Discover:
- Lightweight, no third-party scripts
- Appears after explanation, not before
- Supports understanding, not replaces content
- No ads, no tracking, no UI clutter
Why So Many People Are Getting This Wrong
Three separate discussions are being mixed together:
- Wage definition under the Code on Wages
- PF and ESI restructuring conversations
- Draft gratuity provisions for contract employees
When merged without legal status clarity, they create panic — not compliance.
What Employers and Employees Should Do Now
Employers
- Review salary structures for wage-definition impact
- Avoid premature policy or payroll changes
- Prepare systems without early implementation
Employees
- Don’t assume instant eligibility changes
- Understand wage composition, not just CTC
- Always ask: Is this notified or only proposed?
Final Takeaway
Gratuity rules are not changing overnight.
Understanding is — obligations are not.
Until the labour codes are officially notified:
- The formula stays
- Eligibility rules stay
- Only clarity improves
That clarity prevents payroll errors, false expectations, and compliance risk.
FAQ
Has the gratuity calculation formula changed under the new labour codes?
No. The gratuity calculation formula remains unchanged. Only the calculation base is proposed to shift from Basic + DA to wages as defined under the Code on Wages.
Is gratuity now calculated on wages instead of basic salary?
Once the new labour codes are officially implemented, gratuity will be calculated on wages instead of Basic + DA. This change applies only after formal notification.
Will employees get gratuity after completing one year of service?
The one-year gratuity provision is proposed only for eligible contract or fixed-term employees. There is no change for permanent employees, who still require five years of service.