Gratuity under the new Labour Codes
Who qualifies now, how the 50% wage rule could raise your payout, and the limits that still apply.
Quick answer
Under the Labour Codes, in force from 21 November 2025, permanent employees still qualify for gratuity after 5 years of continuous service. Fixed-term employees now qualify after 1 year, on a proportionate basis. If allowances are more than 50% of your pay, the extra counts as wages, so a payout after 10 years could rise from ₹1,73,077 to ₹2,88,462 in our example.
What changed from 21 November 2025
Gratuity is a lump sum your employer pays when you leave after long service. For decades it came under the Payment of Gratuity Act, 1972. The four Labour Codes came into force on 21 November 2025. Gratuity now sits in the Code on Social Security, 2020.
Most of the old rules carried over. The formula is the same. The 5-year rule for permanent staff is the same. The ₹20 lakh maximum is the same. Two things changed in ways that could affect what you get.
The two changes that matter most
- Fixed-term staff qualify sooner. If you are hired for a set period under a contract, you qualify after 1 year, not 5.
- "Wages" has a floor. If your allowances are more than half of your total pay, the extra is added back to wages. Gratuity is worked out on wages, so a bigger wage figure means a bigger payout.
If your basic pay and DA are already half your pay or more, the wage rule changes nothing for you. Your gratuity stays the same as under the old Act.
Rules as of FY 2026-27. Rates and limits can change; check the Ministry of Labour and Employment (labour.gov.in) before you rely on them.
Who is eligible
You need continuous service with the same employer. How long depends on the type of job you have.
| Type of job | Service needed | Example at ₹50,000 wages a month |
|---|---|---|
| Permanent | 5 years | 4 years 8 months: not yet, 4 months to go |
| Fixed-term | 1 year | 1 year 3 months: eligible, ₹28,846 |
How we worked this out: both rows come from our gratuity module, the same code that runs the gratuity calculator. The fixed-term figure is 15/26 of ₹50,000 for 1 counted year.
Permanent employees: 5 years
The 5-year rule is in section 4(1) of the Payment of Gratuity Act and section 53 of the Code on Social Security. It applies whether you resign, retire or your job ends. Ask HR how your employer counts breaks, leave and transfers.
Fixed-term employees: 1 year, proportionate
Fixed-term employees qualify after one year, on a proportionate basis. In plain words, you earn gratuity for the time you actually served. You do not have to wait 5 years to get anything. A fixed-term worker at ₹50,000 wages a month with 1 year 8 months could get ₹57,692, because a last part-year of more than 6 months counts as a full year.
The 50% wage rule
Gratuity is worked out on "wages". That means basic pay plus dearness allowance (DA), and retaining allowance if you get one. HRA, bonus and overtime usually do not count.
The Labour Codes add a check. If allowances exceed 50% of total pay, the excess is added back to "wages". So wages can't be pushed below half your pay by moving money into allowances.
Before and after, for one salary
Take an illustration. Your total pay is ₹1,00,000 a month. Basic plus DA is ₹30,000, or 30% of pay. Allowances are ₹70,000. That is ₹20,000 more than half your pay, so ₹20,000 is added back. Your wages for gratuity become ₹50,000.
| Years of service | Wages ₹30,000 (30% of pay) | Wages ₹50,000 (50% rule) | Difference |
|---|---|---|---|
| 10 years | ₹1,73,077 | ₹2,88,462 | ₹1,15,385 |
| 20 years | ₹3,46,154 | ₹5,76,923 | ₹2,30,769 |
How we worked this out: each figure is 15/26 times monthly wages times years of service, run through our tested gratuity module. This is an illustration, not a forecast. Your employer may restructure pay in other ways, and the wages you leave on are what count.
The same rule can also change your PF, since PF is a share of wages too. Our EPF contribution breakup guide shows where that 12% goes, and the EPF calculator shows how it could grow.
The formula in one line
Gratuity = 15/26 times your last monthly wages times years of service. A month is taken as 26 working days, so 15/26 of a month's wages is 15 days' pay for each year. A last part-year of more than 6 months counts as a full year. The gratuity calculator explains each step in more detail.
- Last monthly wages (basic + DA)
- ₹60,000
- Service
- 10 years 7 months
- Years counted
- 11
- Estimated gratuity
- ₹3,80,769
The 7 extra months are more than 6, so they round up to an eleventh year. That one rounding adds ₹34,615 compared with 10 counted years.
- Find your last monthly basic pay plus DA. If allowances are more than half your pay, add back the excess.
- Count your completed years. Add one if the last part-year is more than 6 months.
- Multiply wages by 15, divide by 26, then multiply by the years. Cap the answer at ₹20 lakh.
The ₹20 lakh limit and the tax-free amount
The legal maximum is ₹20 lakh (in force since 29 March 2018; carried into the Code on Social Security 2020). The PIB release announced the raise from the earlier limit. Your employer may pay more under its own policy, but the law does not require it.
The cap only bites at high wages and long service. Wages of ₹1,50,000 a month for 25 years work out to ₹21,63,462 by the formula. The legal amount is capped at ₹20,00,000.
How much is tax-free
Up to ₹20 lakh in a lifetime is tax-free. "Lifetime" matters. If you got tax-free gratuity from an earlier job, that amount uses up part of the ₹20 lakh. Check the Income Tax Department site or a CA before you file, and use the income tax calculator for the rest of your income.
Rules as of FY 2026-27. Rates and limits can change; check the Ministry of Labour and Employment (labour.gov.in) before you rely on them.
Central government staff
Central government employees are covered by the CCS (Pension) Rules 2021 / CCS (Gratuity under NPS) Rules 2021; their ceiling is ₹25 lakh from 1 January 2024 (PIB). Their gratuity follows those rules, not the formula in this guide.
State government employees should check their own service rules. If you are a central government employee curious about pay revisions, see the 8th Pay Commission calculator. If you are in NPS, the NPS calculator shows how your pension savings could grow.
The "240 days" court rulings
You may read that 4 years and 240 days counts as 5 years. Some High Courts have counted 240 days worked in the fifth year as a full year. This is not settled everywhere — check with your employer.
If you are close to the 5-year mark, don't plan around this. Ask HR in writing how they count your service. If you are on a fixed-term contract, the question may not arise, since you qualify after 1 year.
FAQs
Will I get gratuity after 4 years 8 months?
As a permanent employee, the rule is 5 years of continuous service, so you would have 4 months to go. Some High Courts have counted 240 days in the fifth year as a full year, but this is not settled everywhere. If you are on a fixed-term contract, you qualify after 1 year.
Who gets gratuity after 1 year?
Fixed-term employees: people hired for a set period under a contract. From 21 November 2025 they qualify after one year, on a proportionate basis. Permanent employees still need 5 years.
Will the new wage rule raise my gratuity?
Only if your allowances are more than 50% of your total pay. Then the excess is added back to wages, and gratuity is worked out on the higher figure. In our example, wages rise from ₹30,000 to ₹50,000, and gratuity after 10 years could rise from ₹1,73,077 to ₹2,88,462.
Is gratuity taxable?
Up to ₹20 lakh in a lifetime is tax-free. Amounts above that could be taxed. Check the Income Tax Department site or a CA for your case.
What is the maximum gratuity?
The legal maximum is ₹20 lakh, in force since 29 March 2018 and carried into the Code on Social Security 2020. Your employer may pay more under its own policy. Central government staff have a ₹25 lakh ceiling from 1 January 2024.
Do I get gratuity if I resign?
Yes, if you have completed the service needed: 5 years for permanent staff, or 1 year for fixed-term staff. Gratuity is paid when you leave, whether you resign, retire or your contract ends.
Sources
- PIB factsheet: Code on Social Security, 2020 (Labour Codes in force from 21 November 2025)
- PIB: gratuity ceiling raised to ₹20 lakh (29 March 2018)
- PIB: central government gratuity ceiling of ₹25 lakh from 1 January 2024
- India Code: Payment of Gratuity Act, 1972 and Code on Social Security, 2020
- Income Tax Department: tax on gratuity
For education only, not tax advice. Based on rules for FY 2026-27. Check with a CA or the Income Tax Department before you file.