New Gratuity Rules 2026: Learn Changes Under New Labour Code, How To Calculate Gratuity

Gratuity is a lump-sum payment made by employers to employees as a reward for long-term service. Simply put, it is a financial 'thank you' for an employee's loyalty and contribution over the years. As the new financial year begins on April 1, employers are gearing up to implement various provisions under the new labour codes. In this context, it is important to understand the changes introduced by the Code on Social Security, 2020, and how they impact gratuity calculations.

New Gratuity Rules Under The Code On Social Security, 2020

The Code on Social Security, 2020, consolidates and updates provisions from the earlier Gratuity Act, marking a significant step in labour reforms. The new framework aims to adapt core concepts of gratuity to the current evolving job market, where fixed-term contracts, gig roles, and frequent job changes are increasingly common.

Here's a look at the key change -

Gratuity for Fixed-Term Employees (FTEs) - One of the most notable changes is the proposal to reduce the minimum service requirement for gratuity from five years to just one year for fixed-term employees. This means that if you are employed on a fixed-term contract, say for two years, you can become eligible for gratuity after completing one year of continuous service. Earlier, many contract workers missed out on gratuity due to the five-year rule.

Working Journalists - The code proposes a gratuity eligibility period for working journalists of three years, instead of five, keeping in mind the nature of employment in the media industry, where shorter tenures are common.

No change for most other employees - For regular, permanent employees, the five-year minimum service requirement remains unchanged.

Expanded coverage - The code aims to broaden social security coverage across sectors. Gig and platform workers are now formally recognised, although gratuity does not directly apply to them. Instead, separate social security benefits are proposed for these groups.

Uniform definition of wages - A key structural change is the standardisation of the definition of "wages" across labour laws. Wages now include basic pay, dearness allowance, and retaining allowance. Importantly, allowances such as HRA and commissions cannot exceed 50% of total remuneration. If they do, the excess amount is added back into wages. This change can increase the base used for calculating gratuity.

How Gratuity Will Be Calculated Under New Labour Code?

The basic formula for gratuity remains unchanged, but the inputs used in the calculation may differ under the new rules:

The basic formula is : Gratuity ≈ (15 ÷ 26) × last drawn monthly wages × completed years of service

Two key factors to consider:

Last drawn wages - With the 50% wage rule, the wage base used for calculation is likely to be higher, which may result in increased gratuity payouts.
Years of service: Fixed-term employees can now qualify after just one year of service, rather than waiting five years, ensuring earlier access to gratuity benefits.

Overall, the new provisions make gratuity more inclusive and aligned with modern employment patterns, offering greater financial security to a wider range of workers.