Gratuity payment: What are the new rules? How is gratuity calculated? Key FAQs answered

The new labour codes, which were implemented from 1 April, have introduced significant changes to provident fund, salary and gratuity payments among others. Under the new labour codes, the Centre has made significant changes in terms of gratuity payment as the revised rules change how ‘wages’ are defined for calculating retirement benefits.

Earlier, there were some confusion as to whether the new labour codes were retrospective in nature. However, the Centre recently clarified that gratuity under the new rules will apply from 21 November 2025.

“Gratuity will be applicable with effect from 21st November 2025 i.e. date of enforcement of the Code. Establishments may make provision as per accounting norms,” the Labour Ministry said in one of its FAQ documents.

Gratuity rule change: Key FAQs answered

Here are some key questions regarding gratuity rule changes answered.

Q: What are the new rules on gratuity payment?

A: There are significant changes in gratuity rules for fixed-term employees. Employers are now required to pay gratuity on termination of contract of such employees after completion of one year of service.

As per the code of social security, employers must pay gratuity to an non-fixed-term employee after five years of completing service. The termination must be for superannuation, retirement or resignation, death or disablement due to accident or disease, or any other event notified by the Central Government.

Q: Who is eligible to get gratuity under new labour code?

A: Under the new labour code, fixed-term employees are now also eligible to get gratuity from their employer even when their contract terminates after the completion of one year. In such cases, gratuity will be calculated on a pro rata basis, meaning employees will receive gratuity proportional to the period they actually worked, even if it is shorter than five years.

Q: How is gratuity calculated?

A: Gratuity is calculated based on the last drawn wages and years of service. For monthly employees, 15 days’ wages per completed year of service is used to calculate gratuity. For piece-rated employees, average of total wages received for 3 months is calculated. For fixed-term employees, gratuity is calculated on pro-rata basis.

Gratuity is calculated on the last-drawn monthly wage × 15/26 × Completed years of service.

Q: When is gratuity disbursed?

A: Employers are required to pay gratuity to employees within 30 days from the date it becomes payable.

Q: What components fall under wages during gratuity calculation?

A: Under Section 2(88) of the Code on Social Security, 2020, “wages” means “all remuneration, whether by way of salaries, allowances or otherwise, expressed in terms of money or capable of being so expressed which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment…”

For gratuity calculation, components include basic pay, dearness allowance and retaining allowance (if any).

Q: Which components are excluded under wages during gratuity calculation?

A: Any component that is not included under “wages” is not applicable for gratuity calculation. These may include bonus payable under new law, value of housing accommodation, or supply of light, water, medical attendance, or other amenities/services excluded by government order, employer’s contribution to EPF, conveyance or travel concession, and HRA among others.

Q: From when will the revised definition of wages be applicable?

A: The revised definition of wages, which will affect gratuity calculation, will be applicable with effect from 21 November, 2025, which is from the day of the implementation of the Labour Codes.

Q: Is a fixed-term employee engaged for 11 months eligible for gratuity under new rules?

A: No. A fixed term employee whose contract expires in 11 months is not eligible for gratuity under the new rules.