Gratuity Rules Simplified: What The Labour Code Means For Your Salary, Here’s How To Calculate

India’s new labour laws, effective November 21, 2025, are set to transform the way employee benefits are calculated, especially gratuity. With the implementation of the four Labour Codes, employees and employers must now adapt to a revised definition of wages, impacting gratuity payouts, provident fund contributions, and overall salary structures. Here’s everything you need to know about gratuity calculation under the new labour law.

Eligibility for Gratuity: What Has Changed

Under the new labour laws, permanent employees still need to complete five years of service to qualify for gratuity. However, fixed-term or contractual employees now become eligible after just one year of employment.

This is a significant step toward providing financial security to short-term employees and reducing past discrepancies in benefits across different employment types.

New Definition of Wages: Why Your Gratuity Could Increase

The key change affecting gratuity calculations is the new definition of wages. According to Section 2(y) of the Code on Wages, 2019, wages now include:

• Basic pay

• Dearness allowance (DA)

• Retaining allowance, if any

Additionally, 50% of total remuneration and up to 15% of non-cash benefits provided by the employer are also considered for gratuity purposes.

This broader definition increases the wage base on which gratuity is calculated, potentially resulting in higher payouts for employees, especially in private-sector jobs.

How Gratuity Is Calculated Under the New Labour Law

The formula for gratuity under the new rules remains straightforward:

Gratuity = (Last Drawn Salary × 15/26) × Number of Years of Service

Here, the “last drawn salary” now incorporates the broader wage definition, not just basic pay and DA.

Example 1:

• Last drawn salary (Basic + DA): ₹1,00,000

• Years of service: 32

• Gratuity payout: ₹16,00,000

Example 2:

• Last drawn salary (Basic + DA): ₹1,25,000

• Years of service: 26

• Gratuity payout: ₹16,25,000

This shows that employees could see significantly higher gratuity payouts under the new rules compared to the previous law.

Government Employees: No Change in Gratuity Rules

It’s important to note that government employees will continue to follow existing gratuity rules. Their calculation is based on:

Gratuity = (Basic Pay + DA) × Qualifying Service (half service years) × 1/4

Government employees can also use the official gratuity calculator to check their expected payout.

Implications for Employees and Employers

The broadened definition of wages simplifies compliance and reduces litigation, but it also comes with higher financial liability for employers. For employees, the new rules mean:

• Higher gratuity payouts

• Potential changes in take-home salary

• Clearer calculation of provident fund and other benefits

For employers, the update calls for careful planning to factor in increased gratuity liabilities and recalculate cost-to-company (CTC) structures.

The new labour codes are a landmark step in modernizing India’s labour laws. Employees now benefit from a fairer and more inclusive calculation of gratuity, while employers gain clarity on compliance. Understanding the new definition of wages and its impact on gratuity is crucial to ensure financial planning and benefit optimization.

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