New Gratuity Rules for Contract Employees: How Gratuity Is Calculated in CTC (India)

Quick formula used across India

Gratuity = (Last drawn Wages) × 15 × Completed years of service ÷ 26

This is the legally accepted gratuity calculator formula under the Payment of Gratuity Act, 1972.
It applies equally to permanent employees and eligible contract / fixed-term employees.

What changes for contract employees is eligibility timing, not the formula.

What Are the New Gratuity Rules for Contract Employees?

There is no separate new gratuity law exclusively for contract employees.
Gratuity for contract, fixed-term, and permanent employees is governed by:

Payment of Gratuity Act, 1972 (as amended)

What is officially confirmed (current status)

• Gratuity law is fully applicable today
• Amendments covering fixed-term employees are already in force
• New Labour Codes (including Social Security Code, 2020) are not yet implemented
• Until notified, old gratuity rules continue to apply

Who Is Considered a Contract Employee for Gratuity?

For gratuity purposes, the following are treated similarly:

• Fixed-term employees (FTE)
• Contract employees on company rolls
• Employees hired for a defined duration with renewal clauses

Key test:
If the employer–employee relationship exists and wages are paid directly, gratuity applies.

Eligibility: Contract vs Permanent Employees

Permanent Employees

• Eligible after 5 years of continuous service
• Exception: death or disability (no minimum service)

Contract / Fixed-Term Employees (Important Change)

• Gratuity is payable even if service is less than 5 years
• Payable on completion of the contract period
• Calculation is done on a pro-rata basis

This is the most misunderstood part.

Example:
If a fixed-term employee is hired for 2 years and completes the contract, gratuity is payable for those 2 years.

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 Calculator

Note: Final applicability depends on official notification of labour codes.

How Gratuity Is Calculated in CTC

Gratuity is not a deduction from salary.
It is an employer cost that is usually shown inside CTC.

Typical CTC Representation

• Wages
• Allowances
• Employer PF contribution
• Gratuity (accrual)

Even if gratuity is shown in CTC:

• It is not paid monthly
• It is paid only when eligibility conditions are met

Gratuity Calculation Example (Contract Employee)

Assumptions

• Wages: ₹20,000 per month
• Contract duration: 2 years
• Completed contract fully

Calculation

₹20,000 × 15 × 2 ÷ 26
= ₹23,077 (approx.)

This amount becomes payable at the end of the contract.

What Salary Component Is Used for Gratuity?

Only these are considered:

• Wages

Excluded:

• HRA
• Bonus
• Incentives
• Overtime
• Allowances of any kind

If your Basic is artificially low, gratuity will also be low.

Continuous Service: What Counts?

Continuous service includes:

• Paid leave
• Weekly offs
• Layoff days
• Maternity leave

A break due to contract expiry followed by fresh hiring may reset gratuity eligibility unless continuity is clearly documented.

Gratuity Calculator in Months (Rounding Rule)

• Service of 6 months or more is treated as 1 full year
• Less than 6 months is ignored

Example:

• 2 years 7 months → 3 years
• 2 years 5 months → 2 years

What Contract Employees Should Check

In Offer Letter / CTC Sheet

• Is gratuity shown as part of CTC?
• Is Basic pay at least realistic and compliant?

In Payslip

• Gratuity will not appear as a deduction
• Only wages value matters for future payout

With HR / Payroll

• Will gratuity be paid at contract end?
• Will service be treated as continuous on renewal?

Common Misconceptions (Corrected)

• “Gratuity is only for permanent employees” → Incorrect
• “Contract employees must complete 5 years” → Incorrect for fixed-term contracts
• “Gratuity is deducted monthly” → Incorrect
• “If it’s in CTC, it’s already paid” → Incorrect

Important Compliance Note

Gratuity is a statutory liability.
Non-payment despite eligibility can attract:

• Interest liability
• Penalties
• Legal claims by the employee

Final Clarity

• Gratuity calculation formula is same for everyone
• Eligibility rules differ for fixed-term / contract employees
• Gratuity in CTC is only a provision, not payment
• New Labour Codes are not active yet; current law continues

This page reflects confirmed, legally applicable rules as of now, without assumptions or future projections.