Gratuity is one of the most valued parts of an employee’s exit benefits, a lump-sum reward for years of service. When India’s four Labour Codes came into force on 21 November 2025, gratuity did not vanish or get rebuilt from scratch. However, three quiet changes around it now affect how much lands in your hands, and how fast.
So this guide covers what changed, what stayed the same, and what you should check on your own payslip. For the wider picture across all four codes, see our detailed guide on the old vs new labour law rules.
The Formula Has Not Changed
The core gratuity formula carries over from the Payment of Gratuity Act, 1972, into the Code on Social Security, 2020, untouched.
It still reads:
Gratuity = (Last Drawn Wages × 15 × Completed Years of Service) ÷ 26
So you still earn 15 days of wages for every completed year, on a 26-day month basis. What changed is the meaning of “last drawn wages,” and that one shift moves the payout for a large part of the salaried workforce.
Change 1: A Wider Definition of “Wages”
The Labour Codes now use one uniform definition of wages: basic pay, dearness allowance, and retaining allowance where it applies. Everything else, like HRA, conveyance, and special allowances, sits outside wages, but with an important guardrail.
The 50% Rule
If your excluded allowances add up to more than 50% of your total pay, the excess gets added back into wages. In effect, your basic pay must work out to at least 50% of CTC. Since gratuity runs on “last drawn wages,” a higher basic pay lifts the gratuity base directly. So for the same years of service, the payout rises.
How This Changes the Gratuity Base
| Particulars | Old structure | New compliant structure |
|---|---|---|
| Monthly CTC | Rs 50,000 | Rs 50,000 |
| Basic pay | Rs 12,000 (24% of CTC) | Rs 25,000 (50% of CTC) |
| Wages used for gratuity | Rs 12,000 | Rs 25,000 |
| Gratuity for 10 completed years | Rs 69,231 | Rs 1,44,231 |
Notice that neither the tenure nor the 15/26 formula moved. Only the wage figure changed. So for employees whose pay leaned heavily on allowances, several industry estimates expect gratuity payouts to rise significantly.
Change 2: Fixed-Term Employees Qualify After Just 1 Year
This is the biggest eligibility change. Earlier, every employee needed five years of continuous service to earn gratuity, apart from cases of death or disablement.
Now, under the Code on Social Security, 2020, fixed-term employees earn gratuity after just one year of continuous service, on a pro-rata basis. For permanent employees, though, the five-year rule stays. So if you work on a fixed-term contract, your gratuity now starts building far sooner.
Change 3: Faster Settlement Timelines
Exit dues move quicker now too. Under the new framework, an employer must settle full and final wages and dues within two working days of your last day, a sharp change from the weeks it often took before. Gratuity itself keeps its own timeline: once it becomes payable, the employer must pay it within 30 days, or interest starts running on the delay.
What Has NOT Changed
| Parameter | Status |
|---|---|
| The 15/26 formula | Unchanged |
| Five-year rule for permanent employees | Unchanged |
| Gratuity on death or disablement | Payable regardless of tenure, unchanged |
| Tax-free ceiling of Rs 20 lakh | Unchanged |
| 30-day payment deadline once payable | Unchanged |
Old vs New Gratuity
| Parameter | Before 21 Nov 2025 | After 21 Nov 2025 |
|---|---|---|
| Governing law | Payment of Gratuity Act, 1972 | Code on Social Security, 2020 |
| Formula | 15/26 × wages × years | Same, unchanged |
| Wage base | Often just basic pay, as structured | Basic pay at least 50% of CTC |
| Permanent employee eligibility | 5 years | 5 years, unchanged |
| Fixed-term employee eligibility | 5 years | 1 year, pro-rata |
| Wage and dues settlement | No fixed statutory deadline | Within 2 working days of exit |
| Tax-free ceiling | Rs 20 lakh | Rs 20 lakh, unchanged |
What Should Employees Check?
- Check your basic pay as a share of CTC. If it sits below 50%, expect a restructure that lifts your gratuity base.
- On a fixed-term contract? Note your joining date. Cross one year of continuous service on or after 21 November 2025, and you qualify for pro-rata gratuity.
- If a restructure trims your take-home slightly, do not read it as a pay cut. Usually, that amount shifts into a higher PF and gratuity base, so it becomes long-term savings.
- Leaving your job? Expect full and final settlement within two working days.
- Remember, the new wage definition applies from 21 November 2025 onward. Service before that date follows the old rules for that period.
For how these same changes affect PF, take-home pay, and the other codes, read our full breakdown of the old vs new labour law rules.
Conclusion
The 15/26 gratuity formula stands exactly as before. What changed is what feeds into it: a wider wage definition that pushes basic pay toward 50% of CTC, a one-year eligibility window for fixed-term staff, and faster settlement at exit. So for many employees, especially those whose pay leaned on allowances, the result is a bigger gratuity corpus at the end, even if take-home dips slightly today.
Need Help Restructuring Payroll for the New Codes?
Aligning salary structures with the 50% wage rule takes careful planning across gratuity, PF, and tax. So if your business needs a hand, our team can guide the transition cleanly. Talk to our experts through our Virtual CFO service, or reach out to us today.
Frequently Asked Questions
1. Has the gratuity formula changed?
No. It stays 15 days of wages for each completed year, divided by 26. Only the wage figure it applies to has changed.
2. Will every employee’s gratuity go up?
Only if your basic pay was below 50% of CTC. If it already met that level, your gratuity base barely changes.
3. Do fixed-term employees really get gratuity after one year?
Yes, on a pro-rata basis under the Code on Social Security, 2020, down from the earlier five-year rule.
4. Is the Rs 20 lakh tax-free gratuity limit changing?
No. The Rs 20 lakh exemption for private-sector employees stays the same.
5. Do the new rules apply retrospectively?
No. They apply prospectively from 21 November 2025. Service before that date follows the old rules for that period.
