Gratuity under the labour codes: who qualifies and how it is calculated
Updated 22 October 2026
Gratuity now comes from Chapter V of the Code on Social Security, 2020, which replaced the Payment of Gratuity Act, 1972 when the four labour codes came into force on 21 November 2025. The formula is the one payroll teams know, 15 days’ wages for each year of service, but two things have changed under it: what counts as “wages”, and who qualifies.
Who qualifies
| Employee | Minimum service | Source |
|---|---|---|
| Permanent employee | 5 years of continuous service | s.53(1) |
| Working journalist | 3 years | s.53(1) |
| Fixed-term employee | 1 year, paid pro rata | Ministry of Labour FAQs; Social Security (Central) Rules, 2026 |
| Death or disablement | No minimum | s.53(1) |
Gratuity is payable on superannuation, retirement, resignation, death, disablement, or the end of a fixed term. The fixed-term rule is new: a fixed-term employee no longer has to complete five years.
“Continuous service” includes breaks for sickness, accident, leave, lay-off, or a strike or lock-out that is not the employee’s fault (s.54). Leave with wages and up to 26 weeks of maternity leave count as days worked.
The formula
Gratuity = last month’s wages × 15 ÷ 26 × years of service
- 15 ÷ 26 is 15 days’ pay, taking a month as 26 working days.
- Years of service counts each completed year, plus one more for a part-year of more than six months. Seven years and seven months counts as eight; seven years and six months counts as seven.
- Wages are the wages last drawn, as the Code defines them (s.2(88)).
What “wages” means now
Wages are all remuneration, minus a closed list of exclusions: HRA, conveyance, overtime, commission, statutory bonus, and the employer’s own PF and pension contributions among them. Basic, DA and retaining allowance are wages, and so is special allowance, because it is not on the list.
Then the 50% rule: if the excluded items come to more than half of total remuneration, the excess is added back to wages. See the 50% wage rule for how the test works.
A worked example
An employee leaves after 7 years and 7 months, with this monthly pay:
| Monthly pay | Amount |
|---|---|
| Basic | ₹20,000 |
| HRA, conveyance, LTA and other excluded allowances | ₹30,000 |
| Total remuneration | ₹50,000 |
The excluded items are 60% of pay. Half of remuneration is ₹25,000, so ₹5,000 is added back, and wages for gratuity are ₹25,000. Seven years and seven months counts as eight years.
| On basic alone | On wages under the Code | |
|---|---|---|
| Monthly base | ₹20,000 | ₹25,000 |
| 15/26 of a month | ₹11,538 | ₹14,423 |
| × 8 years | ₹92,308 | ₹1,15,385 |
The Code’s figure is ₹23,077 higher. An employer still calculating gratuity on basic would underpay this employee by that amount.
Past years, the cap, and paying on time
- Earlier years: gratuity is paid on the wages last drawn. The Ministry’s guidance is that, for anyone leaving on or after 21 November 2025, all years of service are paid on wages as the Code now defines them, including years before the codes came in. It is guidance, not a ruling.
- The cap: ₹20 lakh. No higher limit has been notified under the Code. An employer can pay more by contract or agreement (s.53(5)).
- Paying on time: the employer must work out the amount without waiting for a claim and pay within 30 days of it becoming payable, with simple interest on any delay (s.56). The Code on Wages’ rule that final wages are paid within two working days does not cover gratuity, because gratuity is excluded from wages there.
- Forfeiture: only where service ends for damage to the employer’s property, riotous or violent conduct, or an offence involving moral turpitude in the course of employment (s.53(6)).
- Nomination: an employee nominates after one year of service (s.55).
What to check this month
- Recalculate the gratuity provision on wages as the Code defines them, not on basic. A low-basic structure carries the largest gap.
- Check every fixed-term contract running past a year: those employees now qualify.
- Make sure settlement dates allow the 30-day payment, and that late payments carry interest.
- Check exits since 21 November 2025 that were paid on basic. They may be owed the difference.
Questions
How is gratuity calculated under the new labour code?
15 days' wages for every completed year of service, worked out as 15/26 of the last month's wages multiplied by the years. Wages means basic, DA and every allowance not on the Code's exclusion list, plus any excess where the excluded items come to more than half of pay.
Who is eligible for gratuity under the new labour code?
An employee with five years of continuous service; a working journalist after three. There is no minimum on death or disablement. A fixed-term employee is paid pro rata after one year, according to the Ministry's FAQs and the Central Rules.
Does more than six months count as a full year?
Yes. A part-year of more than six months counts as a completed year, so 7 years and 7 months is paid as 8 years. Six months or less is not counted.
Is gratuity now paid on basic salary only?
No. For anyone whose last working day is on or after 21 November 2025, gratuity is paid on wages as the Code defines them, which include special allowance and any add-back under the 50% rule. The figure is often higher than on basic and DA.
What is the maximum gratuity under the new labour code?
₹20 lakh, the ceiling the Ministry of Labour says is in force. No higher limit has been notified under the Code. An employer may pay more by agreement.
When must gratuity be paid?
Within 30 days of it becoming payable, with simple interest if it is paid late. It is not part of the Code on Wages' two-working-day deadline for final wages.