Latest gratuity law changes in India 2026: What employees should know

India’s gratuity framework changed materially from 21 November 2025, when the labour codes took effect nationwide. The most relevant changes for employees are the revised statutory definition of wages, a one-year gratuity eligibility rule for directly engaged fixed-term employees, and updated claim and compliance procedures. The ₹20 lakh statutory ceiling remains important, but it comes from an earlier 2018 amendment and is not the main new change in 2026.

This guide explains the current position in practical terms. Actual entitlement depends on the law applicable to the establishment, the employee’s status, continuity of service, last-drawn wages, and the event that ends employment. Employees should use payroll records and their written employment contract when checking an estimate.

What changed in the gratuity law from 21 November 2025?

The Code on Social Security, 2020 replaced the earlier central gratuity framework when the relevant labour-code provisions took effect on 21 November 2025. Gratuity continues as a statutory employment benefit, but eligibility and calculation must now be read with the code’s common definition of wages, the special provision for fixed-term employment, and the applicable central or state rules.

• The revised definition of wages applies to gratuity calculations from 21 November 2025.
• Eligible fixed-term employees directly hired by an employer can qualify after one year under the contract.
• Expiry of a fixed-term employment contract is expressly recognised as an event on which gratuity may become payable.
• The Ministry’s transition clarification uses last-drawn wages under the new framework for qualifying exits on or after 21 November 2025.

The change does not mean every employee receives gratuity after one year. The one-year provision is specific to fixed-term employees who meet the legal definition and are directly engaged by the employer.

How does the revised definition of wages affect gratuity?

Gratuity is linked to last-drawn wages. Under the labour codes, wages generally include basic pay, dearness allowance, and retaining allowance, if any. Certain listed components may be excluded, but where specified exclusions exceed 50% of total remuneration, the excess is added back for statutory calculations. This can increase the wage base for some salary structures.

For example, if excluded allowances make up more than half of remuneration, payroll cannot necessarily calculate gratuity using only a low basic-pay figure. The statutory add-back mechanism must be considered. This is a simplified explanation, not a universal salary-restructuring formula. The treatment of each component depends on the statutory definition, records, and applicable rules.

Who can receive gratuity after one year?

A fixed-term employee who is directly engaged by an employer under a written contract for a fixed period can become eligible after completing one year of service under that contract. The Ministry has clarified that fixed-term employment does not include contract labour supplied through a contractor merely because the deployment has a defined duration.

For contract labour, the employer for gratuity purposes may be the contractor under the applicable arrangement and law. The Ministry’s March 2026 clarification states that the contractor pays gratuity after five years of continuous service in the ordinary case. Workers should therefore check who issued the employment contract, pays wages, and maintains statutory records.

Does the five-year rule still apply to permanent employees?

Yes, the ordinary qualifying condition continues to be five years of continuous service for employees who do not fall within the fixed-term exception. The five-year condition is not required where employment ends because of death or disablement, and gratuity may also become payable on other events specified by law. Readers should avoid assuming that four years plus a particular number of days always counts as five years. Judicial decisions can turn on the establishment’s work pattern and facts.

Where service falls just short of five completed years, obtain case-specific advice, or a written determination from the competent authority rather than relying on a generic online rule.

How is gratuity calculated under the current framework?

For a monthly rated employee, the broad statutory method is 15 days’ wages for every completed year of service or part exceeding six months. A commonly used expression is: gratuity = last-drawn monthly wages × 15 ÷ 26 × qualifying years. The result is subject to the statutory ceiling and any more favourable contractual terms.

Illustration: If last-drawn wages for gratuity are ₹60,000 per month and qualifying service is 12 years and 8 months, the service is generally counted as 13 years. The indicative amount is ₹60,000 × 15 ÷ 26 × 13 = approximately ₹4,50,000. This illustration ignores case-specific exclusions, rounding, ceiling changes, and better employer terms.

The ₹20 lakh ceiling is a maximum statutory limit, not a standard payout. The actual amount can be lower because it depends on wages and service. An award, agreement, or employment contract may provide better gratuity terms, subject to applicable law.

How are earlier years of service treated after the change?

The Ministry has clarified that where gratuity becomes payable on or after 21 November 2025, it is calculated using the employee’s last-drawn wages under the code. The service period is not split into separate pre-code and post-code calculations merely because part of the employment occurred before the commencement date.

This point matters for long-serving employees whose salary structure changed. They should retain appointment letters, payslips, increment letters, and continuity records. Employers should document the wage components used, the qualifying service counted, and the statutory formula so that the determination can be checked.

What should employees check before accepting a gratuity calculation?

Start with the employment relationship and the exit event, then verify the calculation inputs. A calculation sheet is more useful than a single payout figure because it shows whether the correct wage base and service period were used:

• Confirm whether you are permanent, fixed-term, directly employed, or engaged through a contractor.
• Check the start date, last working date, and any breaks that may affect continuous service.
• Match the wage figure against the statutory definition and the 50% add-back rule.
• Confirm how service exceeding six months was rounded for each completed year.
• Check nomination details, especially after marriage or a family-status change.
• Ask for the written determination and payment details if the amount differs from your estimate.

What should employers and payroll teams update?

Employers should map salary components to the new definition of wages, identify genuine fixed-term employees, revise gratuity provisioning, and maintain records that support each determination. Contract templates and HR systems should not label a worker as fixed-term unless the legal requirements are met. The applicable rules prescribe forms and processes for nomination, claims, employer determination, and payment or rejection notices.

The appropriate government may be central or state depending on the establishment, so one central checklist may not cover every procedural detail. Legal and payroll review is advisable for unusual employment structures or disputed service records.

Is the ₹20 lakh ceiling a new 2026 amendment?

No. The increase from ₹10 lakh to ₹20 lakh followed the Payment of Gratuity (Amendment) Act, 2018 and the related central notification. It remains relevant as the statutory maximum commonly cited under the current framework, but presenting it as the latest 2026 amendment would be misleading.

How can gratuity fit into retirement planning?

Gratuity is a one-time employment benefit, not a complete retirement plan. Before committing the money, consider near-term expenses, emergency reserves, outstanding liabilities, retirement income needs, and liquidity. ABSLI provides Life Insurance and retirement solutions, but any product decision should be based on the applicable product terms, risk profile, and personal needs.

Also Read

Gratuity after resignation or termination in 2026

Gratuity after one year under the new labour law

Gratuity rules for smaller companies in India

Gratuity calculator

Sources

Ministry of Labour and Employment, Additional FAQs on Labour Codes, 16 March 2026: https://www.labour.gov.in/static/uploads/2026/03/a4ccf4c6d97c4f1f36a6d83f8c64213d.pdf

Ministry of Labour and Employment, FAQs on Labour Codes, 30 December 2025: https://www.labour.gov.in/static/uploads/2026/01/de4758d5bfeffc456d7de97a801891b0.pdf

Code on Social Security, 2020, official text: https://www.labour.gov.in/static/uploads/2025/07/b0620548445580767b5c0d18c95c26f7.pdf

Ministry of Labour and Employment, Compliance Handbook for Employers under the Four Labour Codes, 2026: https://www.labour.gov.in/static/uploads/2026/02/83978455025732b99b0165def80ab171.pdf

Ministry of Labour and Employment, Labour Codes portal: https://www.labour.gov.in/offerings/schemes-and-services/details/labour-codes-gzNzQzMtQWa

Press Information Bureau, Payment of Gratuity (Amendment) Act 2018 context: https://www.pib.gov.in/newsite/PrintRelease.aspx?relid=178218&reg=3&lang=2