The new labour laws, implemented on November 21 last year, have significantly overhauled the country’s framework governing employment, workplace policies, and wages. The implementation of new labour codes has also brought important changes to gratuity rules, impacting both employees and employers. One of the most significant updates is how “wages” are defined, which directly affects how gratuity is calculated and could lead to higher payouts.
There was initial confusion about whether these rules would apply retrospectively. However, the government has clarified that the revised gratuity provisions will be applicable from November 21, 2025 — the date when the Code comes into force, according to the Labour Ministry’s FAQs.
Gratuity rules: What remains unchanged
The updated framework retains the basic structure of gratuity. As per the Labour Ministry’s FAQs, gratuity continues to be payable after five years of continuous service for regular employees. It is triggered on termination due to retirement, resignation, superannuation, death, disablement, or other notified events.
The calculation method also broadly remains the same — linked to last drawn wages and years of service, with 15 days’ wages paid for each completed year.
Fixed-term employees get wider coverage
A key change is the inclusion of fixed-term employees. According to the Labour Ministry’s FAQs, employers are now required to pay gratuity if such employees complete at least one year of service. The amount will be calculated on a pro-rata basis depending on the period worked.
However, the rules clearly set a minimum threshold. Fixed-term employees with contracts shorter than one year — such as 11 months — will not be eligible for gratuity, as per the FAQs.
How gratuity is calculated
The formula for calculating gratuity remains unchanged. As explained in the Labour Ministry’s FAQs, it is based on last drawn wages and completed years of service, using the standard formula: last drawn monthly wages × 15/26 × completed years of service.
Explaining this, Vibhore Goyal, Founder, Onebanc, said gratuity continues to be a statutory retirement benefit linked to tenure and wages.
He noted that the broad rule still applies — gratuity becomes payable after at least five years of continuous service, and the calculation reflects 15 days’ wages for each completed year based on last drawn wages.
For fixed-term employees, he added, eligibility can arise after one year, with payout calculated on a pro-rata basis under the Social Security Code framework.
Goyal also pointed out that employers must ensure gratuity is paid within 30 days from the date it becomes payable.
Why gratuity payouts may increase
The bigger shift comes from the revised definition of wages. As per the Labour Ministry’s FAQs, wages now include basic pay, dearness allowance and retaining allowance, and must constitute at least 50% of total remuneration.
If allowances exceed this limit, the excess portion is added back to wages for statutory calculations, including gratuity.
Highlighting the impact, Suchita Dutta, Executive Director of Indian Staffing Federation (ISF), said the 50% wage rule has significantly transformed gratuity calculations.
She explained that when excluded allowances like HRA or special allowances exceed the threshold, the excess is added back to wages, increasing the base for gratuity calculation.
Gratuity itself continues to be calculated as (Last Drawn Wages × 15/26) × completed years of service, but the enlarged wage base directly raises the payout.
Dutta added that earlier, many employers kept basic pay at 30–40% of total salary to reduce liabilities. The new rule restricts this practice and can push gratuity payouts higher — in some cases by 20–50% or more for long-serving employees.
What is included and excluded in wages
The Labour Ministry’s FAQs clarify that for gratuity calculation, wages include basic pay, dearness allowance and retaining allowance.
At the same time, components such as bonus, house rent allowance (HRA), employer contributions to EPF, conveyance and certain other benefits remain excluded from the definition.
Payment timeline and employer responsibility
The rules around payment timelines remain strict. As per the Labour Ministry’s FAQs, employers must pay gratuity within 30 days from the date it becomes payable.
Goyal emphasised that companies need to look beyond compliance and manage gratuity more actively.
He said the real challenge is often not gratuity itself but how companies design payroll structures. Instead of relying only on provisioning, firms should focus on better modelling using factors like tenure, attrition and compensation mix so that gratuity is treated as an ongoing liability.
What it means for employees and companies
Overall, the new gratuity rules expand eligibility, especially for fixed-term employees, while the revised wage definition could lead to higher payouts.
For employees, this strengthens retirement benefits and brings more fairness in how compensation is structured. For employers, it means higher costs and a need to redesign salary structures to stay compliant under the new labour codes.
Disclaimer:
This article is for informational purposes only and is based on publicly available FAQs issued by the Labour Ministry and expert views. The interpretation of labour laws and gratuity provisions may vary depending on specific employment terms, company policies and future regulatory updates. Readers are advised to consult qualified professionals or refer to official government notifications before making any financial or employment-related decisions.