Quick answer: Gratuity = (last drawn wages ÷ 26) × 15 × years of service. Since 21 November 2025, "wages" follow the 50% rule, not Basic + DA alone. With gross pay of ₹60,000 and Basic + DA of ₹24,000, wages are ₹30,000, so 5 years' gratuity is ₹86,538 instead of ₹69,231. For exits from 21 November 2025, the new wages apply to your whole service.
Gratuity calculation under the new labour codes is no longer a proposal. The Code on Social Security, 2020 has been in force since 21 November 2025, and gratuity is now worked out on "wages" under the 50% rule instead of Basic + DA alone. The formula, the 5-year rule for permanent employees and the ₹20 lakh ceiling did not change. For the wider picture, see the new Labour Codes guide. This guide explains the new gratuity rules for 2026, what the Labour Ministry's FAQs clarified, and how the change affects your payout, with worked examples.
Work out your own figure with the gratuity calculator under the new labour code. To see how the 50% rule changes your PF and take-home pay as well, use the new labour code salary calculator.
New gratuity rules 2026: what changed and what didn't
| Point | Before 21 Nov 2025 (Gratuity Act, 1972) | Now (Code on Social Security, 2020) |
|---|---|---|
| Salary base | Basic + DA | Wages: Basic + DA + retaining allowance, plus allowances above 50% of pay |
| Formula | (Salary ÷ 26) × 15 × years | Same |
| Permanent employees | 5 years of continuous service | Same (Section 53) |
| Fixed-term employees | 5 years | 1 year, pro rata |
| Part-year | More than 6 months counts as a year | Same |
| Ceiling | ₹20 lakh | ₹20 lakh (Labour Ministry, August 2026) |
| Forms | Forms F, I, J, L | Forms III, IV, V (Central Rules, 2026) |
How wages for gratuity are worked out: the 50% rule
- 1. Start with Basic + DA + retaining allowanceThese are always wages.
- 2. Add up the excluded itemsSuch as HRA, conveyance and other allowances.
- 3. Compare with 50% of total remunerationIf the excluded items are more than half, the excess is added back to wages.
| Item | ₹ per month |
|---|---|
| Gross salary | 60,000 |
| Basic + DA | 24,000 |
| Allowances (60,000 − 24,000) | 36,000 |
| 50% of gross salary | 30,000 |
| Excess added back | 6,000 |
| Wages for gratuity | 30,000 |
If your Basic + DA is already 50% or more of your pay, your gratuity does not change. The rise is largest for salary structures with a low Basic and high allowances.
What the Labour Ministry's FAQs clarified
The Ministry of Labour and Employment issued FAQs on the codes on 30 December 2025 and a further set on 16 March 2026 (SCC Online analysis). On gratuity and wages they say:
- Gratuity and retrenchment compensation are left out of the 50% test.
- Performance-based incentives, ESOPs and reimbursements are not wages.
- Overtime allowance is counted in the 50% test, so a month with heavy overtime can raise wages for that month.
- Remuneration in kind counts towards wages only up to 15% of total wages.
- Gratuity is calculated on wages last drawn when employment ends.
Does the new rule apply to past service?
Yes, for anyone who leaves on or after 21 November 2025. Per the Ministry's March 2026 FAQs, service before that date is counted under the old Act and service after it under the Code, but the last drawn wages under the new definition decide the gratuity for the whole period.
Example: an employee joined in 2015 and leaves in 2026 after 11 years, with gross ₹60,000 and Basic + DA ₹24,000. Gratuity on new wages of ₹30,000 is (30,000 ÷ 26) × 15 × 11 = ₹1,90,385, against ₹1,52,308 on Basic + DA, which is ₹38,077 more.
The 50% rule raises gratuity by a quarter in this example
Gross pay ₹60,000; Basic + DA ₹24,000; wages under the Code ₹30,000
Source: HR Calcy calculation, wages × 15 ÷ 26 × years
This is why large employers took one-time charges in the October–December 2025 quarter: TCS ₹2,128 crore, Infosys ₹1,289 crore and HCLTech ₹956 crore, mainly for higher gratuity and leave liabilities on past service (People Matters).
Fixed-term and contract employees
- Fixed-term employees qualify after 1 year of service and are paid pro rata. Per the Ministry FAQs, someone on an 11-month contract, or who leaves before completing one year, is not eligible.
- Contract labour engaged through a contractor still needs 5 years of continuous service, and the contractor is liable to pay.
- Example: a fixed-term contract ending at 1 year 8 months with wages of ₹25,000 is counted as 2 years: (25,000 ÷ 26) × 15 × 2 = ₹28,846.
For how gratuity shows in a fixed-term CTC, read gratuity for fixed-term employees.
What has not changed
- 5 years for permanent employees. Courts have treated 4 years plus 240 days worked in the fifth year as 5 years; see gratuity after 4 years 8 months.
- No minimum service on death or disablement.
- ₹20 lakh ceiling for statutory gratuity, and a ₹20 lakh lifetime tax-free limit for private employees, now under Section 19 of the Income-tax Act, 2025. See retirement gratuity for the tax rules.
- Payment within 30 days of gratuity becoming payable, with interest if late.
- Government employees are outside this change; see 7th Pay Commission gratuity.
New gratuity forms from 8 May 2026
The Code on Social Security (Central) Rules, 2026 were notified on 8 May 2026. For establishments under them (Rule 32, Rule 33):
- Form III for nomination, ordinarily within 90 days of completing one year of service. Existing employees were given 90 days from the rules' commencement.
- Form IV to apply for gratuity, ordinarily within 30 days of it becoming payable.
- Form V for the employer's notice admitting or rejecting the claim, within 15 days of the application.
Establishments under a state government follow that state's rules.
What employees and employers should do
Employees
- Check your payslip: if Basic + DA is below half of your gross pay, your gratuity should be on the higher wage figure.
- Make sure your Form III nomination is filed.
- On exit, check that your gratuity uses new wages for your full service.
Employers
- Recompute gratuity liability on new wages for all employees, including past service.
- Recalculate any settlement made after 21 November 2025 on the old basis and pay the difference.
- Run each salary structure through the new labour code salary calculator to see the wage base, and review the component split with the salary breakup calculator.
For the full codes in plain words, read the new Labour Codes guide, the Code on Wages guide and the Social Security Code guide.
Learn gratuity and salary calculation properly. The free course on salary calculation under the new Labour Codes works through the 50% rule, PF and gratuity step by step. For a desk reference, the New Labour Codes practical guide (eBook) covers all four Codes. Test yourself with the Labour Codes quiz.
Frequently asked questions
How is gratuity calculated under the new labour codes?
Gratuity = (last drawn wages ÷ 26) × 15 × years of service. Wages are Basic + DA + retaining allowance, plus any allowances above 50% of total pay.
Are the new gratuity rules in force?
Yes. The Code on Social Security, 2020 came into force on 21 November 2025, and its Central Rules were notified on 8 May 2026.
Has the gratuity formula changed?
No. It is still 15 days' wages for each year, using 26 working days a month. Only the salary base changed from Basic + DA to wages.
Will my gratuity increase under the new labour codes?
It increases if your allowances are more than half your pay. If Basic + DA is already 50% or more of your pay, your gratuity stays the same.
Is past service calculated on the new wages?
Yes, if you leave on or after 21 November 2025. The Ministry's FAQs say last drawn wages under the new definition set the gratuity for the whole period, including service before the codes.
Do all employees get gratuity after 1 year now?
No. Only fixed-term employees qualify after 1 year. Permanent employees still need 5 years of continuous service, except on death or disablement.
Is an 11-month contract eligible for gratuity?
No. Per the Ministry's FAQs, a fixed-term employee needs at least one year of service, so an 11-month contract does not qualify.
Is overtime included in wages for gratuity?
Overtime itself is not wages, but it counts in the 50% test. If it pushes excluded items above half of pay, the excess is added back to wages for that month.
What is the maximum gratuity under the new code?
₹20 lakh for statutory gratuity, unchanged. The tax-free limit for private employees is also ₹20 lakh in a lifetime.
Which form is used to claim gratuity now?
Form IV under the Code on Social Security (Central) Rules, 2026. The employer replies in Form V. Nomination is in Form III.
Based on the Code on Social Security, 2020, the Code on Wages, 2019, the Central Rules, 2026 and the Labour Ministry's FAQs of 30 December 2025 and 16 March 2026. Interpretation can change through notifications and court rulings. This is general information, not legal or tax advice.