Last updated 15 August 2026 · By Devendra Khandegar
About this article. Kredily builds payroll and HR compliance software, so we have a commercial interest in employers getting this right. This is our reading of the law as at 15 August 2026, written to be checkable — statutory claims are quoted from the bare Acts or the Ministry’s own FAQs and linked, and where we are interpreting rather than quoting we say so. It is general information, not legal, tax, accounting or actuarial advice. The wage-base classification that every rupee figure below depends on is an interpretation of a recently commenced statute with no case law behind it yet; the full reasoning is set out in our guide to the new labour codes. Before you restate a provision or change how you classify an employee, confirm it with your auditor, CA or counsel.
Of everything the four labour codes changed on 21 November 2025, gratuity is the line most likely to move on your balance sheet. Not because the formula changed — it did not — but because the wage base underneath it did, and because two categories of workers who previously accrued little or nothing now accrue much earlier.
This page covers the gratuity changes specifically: the revised wage base, the treatment of service before 21 November 2025, the one-year threshold for fixed-term employees, and where liability sits for contract labour. For the wage definition itself — Section 2(y), the eleven exclusions and the 50% test — the pillar page covers the full mechanism.
In force since 21 November 2025 — not April 2026
The codes commenced on 21 November 2025, and the Ministry of Labour & Employment is explicit that gratuity follows them: “Gratuity, based on revised definition of wages will be applicable w.e.f. 21.11.2025 i.e. date of implementation of the Codes” (Ministry of Labour & Employment, Additional FAQs, Sl. No. 6, 16 March 2026).
April 2026 belongs to the Central Rules, which are implementation detail still being finalised — not to the codes. If your provisioning still treats the change as something coming next quarter rather than something nine months old, that is the first thing to correct.
The formula is the same. The wage base is not.
Gratuity remains 15 days’ wages for each completed year of service, computed on last-drawn wages — (15 ÷ 26) × monthly wages × years of service — under Section 53 of the Code on Social Security, 2020. One detail worth carrying into your model: Section 53(2) accrues gratuity for every completed year “or part thereof in excess of six months”, so an employee leaving at five years and seven months accrues six years of gratuity, not five.
What changed is what “wages” means. The definition in Section 2(y) of the Code on Wages, 2019 is inclusive: everything you pay is wages unless it falls within a closed list of eleven exclusions. For a typical Indian salary structure, in broad strokes:
| Component | Counts as wages? |
|---|---|
| Basic pay | ✅ Yes — expressly included |
| Dearness allowance | ✅ Yes — expressly included |
| Special allowance (generic, residual) | ✅ On our reading, yes — not on the exclusion list |
| House rent allowance | ❌ Excluded — clause (f) |
| Conveyance allowance | ❌ Excluded — clause (d) |
| Employer PF contribution | ❌ Excluded — clause (c) |
| Overtime allowance | ❌ Excluded — clause (h) |
The special allowance row is the one that moves the money, and it is an interpretation, not a quotation. Section 2(y) does not name “special allowance” either way, and there is no case law on it yet. The reasoning, the full exclusion list and the 50% test that sits on top of it are set out in the wage-definition section of our labour codes guide — we have not repeated them here. If your special allowance has genuine reimbursement characteristics, take advice before reclassifying anything.
What the corrected base does to the number
Take the ₹50,000 monthly structure worked through on the pillar page: basic ₹15,000, HRA ₹7,500, conveyance ₹1,600, special allowance ₹25,900. On our reading of Section 2(y), wages are ₹15,000 + ₹25,900 = ₹40,900 — not the ₹15,000 a basic-plus-DA shorthand would use.
| On ₹15,000 (basic + DA shorthand) | On ₹40,900 (Section 2(y) wages) | |
|---|---|---|
| Accrual per year of service | ₹8,654 | ₹23,596 |
| Monthly provisioning equivalent | ₹721 | ₹1,966 |
| After 5 years of service | ₹43,269 | ₹117,981 |
| After 10 years of service | ₹86,538 | ₹235,962 |
That is a 173% increase in accrual with no change to anyone’s salary. Figures are rounded to the nearest rupee.
The comparison holds only if you were previously computing gratuity on basic plus DA — a common shorthand under the Payment of Gratuity Act, though we have no figures on how widely it was used. If you already computed gratuity on total non-excluded remuneration, the wage-base change does not move your number, though the sections below still might.
One ceiling sits on top of all of this. Section 53(3) of the Code caps the gratuity payable at “such amount as may be notified by the Central Government”. The ceiling notified under the previous law was ₹20 lakh (S.O. 1420(E), 29 March 2018), and we have not located a fresh notification under the Code that changes it — treat ₹20 lakh as the working ceiling, and if senior-band accruals approach it, confirm the current position before provisioning. Every figure on this page sits far below it. Separately, Section 53(5) preserves an employee’s right to “better terms of gratuity under any award or agreement or contract” — the ceiling caps the statutory entitlement, not what you may choose to pay.
One thing worth keeping straight when explaining this internally: gratuity is an employer provision, not a payslip deduction. The employee sees it once, at exit, as part of full and final settlement — the monthly payslip does not change because of anything on this page. What actually lands in the payslip is a separate exercise.
Service before 21 November 2025 — the largest open number
Many employers assume service is bifurcated: gratuity for the years before 21 November 2025 on the old basis, and the new basis only for service after. The Ministry’s answer points the other way. Asked exactly this, it replied that “the employee will be paid gratuity based on the rate of wages last drawn by the employee at the time of superannuation or retirement or resignation or death etc, on and after 21.11.2025 as per the provisions of Code on Social Security, 2020” (Sl. No. 11 and 17).
Read plainly, that is last-drawn wages under the new definition, applied to the whole period of service, with no split. Two cautions before you book that: the FAQ does not use the words “no bifurcation”, and it is clarificatory administrative guidance rather than a notification, rule or judgment. We are reading it, not quoting a conclusion.
Here is what the two readings do to the same employee — ten years of service, eight of them before the codes commenced, on the structure above:
| Reading | Arithmetic | Gratuity |
|---|---|---|
| Split: old basis to Nov 2025, new basis after | 8 × ₹8,654 + 2 × ₹23,596 | ₹116,423 |
| No split: last-drawn new-definition wages, all 10 years | 10 × ₹23,596 | ₹235,962 |
The gap is ₹119,538 — per employee, on a mid-range structure, and it widens with tenure. Across a workforce with long-serving staff this is the largest number in the whole exercise, which is exactly why it belongs with counsel or your actuary rather than being treated as settled on the strength of a website, including this one.
Fixed-term employees now qualify at one year, not five
The Ministry is direct: “Fixed Term Employee (FTE) will be eligible for gratuity if he/she renders service under the contract for a period of one year” (Sl. No. 14/19).
The statute reinforces this from two directions. The provisos to Section 53 of the Code on Social Security lift the five-year continuous-service requirement where employment ends on the expiry of a fixed-term contract, and direct that a fixed-term employee is paid gratuity on a pro rata basis — proportionate to the period actually served. We are describing those provisos rather than quoting them; check the section text before relying on the exact wording. On a straight proportionate reading, an FTE who completes an 18-month contract on the ₹40,900 wage base above accrues roughly ₹35,394 — one and a half years at ₹23,596.
⚠️ The 11-month contract question is open. Many employers run 11-month renewable contracts precisely to sit under one-year thresholds. Whether service across renewed back-to-back contracts aggregates to “one year” is not addressed in the Ministry’s FAQs. If you run rolling fixed-term contracts this is a question for counsel, not for a website — including this one. Do not assume renewal resets the clock.
Three practical consequences follow for HR. Every fixed-term employee needs to be on a list with contract start date, end date and renewal history, because eligibility is now measured in months, not years. Provisioning policy needs an auditor’s view — whether you provide from month one for FTEs expected to cross a year, or only at the threshold. And if your renewal pattern looks like the blockquote above, the legal view should come before the first contract crosses twelve months, not after.
Contract workers: the contractor pays — but check your exposure
For contract labour, the obligation sits with the contractor as the employer: “The employer (i.e. Contractor) will pay gratuity on rendering of five years continuous service at the rate of 15 days wages for each completed year of service based on the last drawn wages” (Sl. No. 16).
⚠️ Checking the contract clause is necessary, not sufficient. Section 21 of the Contract Labour (Regulation and Abolition) Act, 1970 makes a principal employer liable to pay wages to contract workers where the contractor fails to do so, recoverable from the contractor (full text). Whether that principle extends to gratuity is a contested question that the Ministry’s FAQs do not resolve, and we are not going to assert an answer to it. Two further unknowns: whether five years’ continuous service survives a change of contractor when the same workers remain on site, and what your practical exposure is if a contractor cannot pay. If your contract is silent on gratuity, ask counsel what protection fits your arrangement.
What to do
These are starting steps, not sign-off. Confirm with your auditor, actuary or counsel before restating any booked provision or changing how anyone is classified.
- Recompute the gratuity wage base against the Section 2(y) exclusions, band by band — the pillar’s classification walkthrough is the place to start, and the special-allowance caution above applies to every band.
- Model the provision at the corrected base across headcount and tenure. The per-employee arithmetic is above; aggregating it across bands is a modelling exercise your auditor or actuary will want to own. Round part-years per Section 53(2) rather than truncating them.
- Put the pre-code-service question to counsel or your actuary before booking either reading. The gap between them is the largest number on this page.
- List every fixed-term employee with contract dates and renewal history, and get a legal view on whether your renewals aggregate.
- Review contractor agreements for the gratuity obligation, and ask counsel about your residual exposure if a contractor defaults or changes.
- Decide the disclosure line. Whichever readings you adopt, note the assumptions in the provision working papers so an auditor can see what was assumed and why.
What is still unsettled
The treatment of service before 21 November 2025 rests on a plain reading of administrative FAQs, not on a rule or a judgment. Whether service across renewed fixed-term contracts aggregates to the one-year threshold is unaddressed. The extent of any principal-employer liability for a defaulting contractor’s gratuity is contested, and whether continuous service survives a change of contractor is unknown. Upstream of all of it, the classification of a generic special allowance under clause (e) of Section 2(y) — the reading every figure here depends on — has no case law behind it, and the related questions on the 50% test’s denominator and a CTC gratuity line are open too; they are catalogued on the pillar page. Where the source material does not answer a question, this page does not answer it either.
Frequently asked questions
When do the new gratuity rules apply from?
From 21 November 2025, the date the four labour codes came into force. The Ministry’s FAQs state that gratuity based on the revised definition of wages applies from that date. April 2026 relates to Central Rules, which are implementation detail — not to the obligation itself.
Has the gratuity formula changed?
No. Gratuity remains 15 days’ wages per completed year of service on last-drawn wages — (15 ÷ 26) × monthly wages × years — under Section 53 of the Code on Social Security, 2020. What changed is the wage base the formula runs on.
Is gratuity now calculated on gross salary?
Not exactly. It is calculated on “wages” as defined in Section 2(y) of the Code on Wages: all remuneration except eleven listed exclusions such as HRA, conveyance and employer PF. On our reading a generic special allowance counts, which for many structures brings the base much closer to gross than to basic — but the two are not the same thing.
Are fixed-term employees eligible for gratuity?
Yes. The Ministry’s FAQs put eligibility at one year of service under the contract, and Section 53’s provisos direct pro-rata payment where the contract expires. Whether service across renewed back-to-back contracts aggregates to one year is not yet addressed — take advice if you run rolling contracts.
Does gratuity still require five years of service?
For regular employees, yes — five years of continuous service remains the threshold. The exceptions are fixed-term employees, for whom the Ministry puts eligibility at one year with pro-rata payment, and cases such as death, where the five-year requirement does not apply.
What about employees whose service began before November 2025?
The Ministry’s answer points to last-drawn wages under the new definition applied to the whole period of service, with no split between old and new regimes. The FAQ does not state this in terms, and it is guidance rather than law — for long-tenured staff the difference is large, so put it to counsel before booking either reading.
Who pays gratuity for contract workers?
The contractor, as the employer, per the Ministry’s FAQs. A principal employer’s statutory liability for wages under the Contract Labour Act is settled; whether it extends to gratuity is contested and unresolved. Review what your contract says and ask counsel about residual exposure.