New gratuity rules from 1 April: Impact on take-home pay, eligibility and calculations explained

Indian employees could get higher gratuity payouts under the new Labour Codes announced by the government late last year. The revised rules change how ‘wages’ are defined for calculating retirement benefits, according to experts.

Under the revised framework, wages used for gratuity calculations will include basic pay, dearness allowance (DA) and retaining allowance, which together must constitute at least 50% of an employee’s total cost-to-company (CTC).

Notably, gratuity is almost always included in the CTC despite no strict legal mandate requiring employers to show it in the offer letter. Rishi Agrawal, CEO and co-founder of Teamlease Regtech, noted that most companies include it because it represents a statutory financial liability they must provision for.

When is gratuity under new Labour Codes applicable?

While there was some confusion about whether the new Labour Codes were retrospective in nature, the government has clarified that gratuity under the new Labour Codes will apply from 21 November 2025, the date of implementation.

“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.

How will gratuity be calculated under the new rules?

As per the new codes, fixed-term employees (FTEs)become eligible for gratuity after one year of continuous service, down from the earlier requirement of five years. However, this rule only applies to employees who joined a company on or after the new Labour Codes were implemented.

Notably, gratuity is calculated based on the last drawn wages and years of service. With basic salary set to comprise a larger proportion of pay, the exit lump sum is expected to also increase.

Additionally, the ministry clarified that gratuity pay will be calculated based on last drawn wages at the time of exit from the company, which may be due to retirement, resignation, or death, under the new rules.

If you are not a new joinee, the update is not a disadvantage for you either. Agrawal noted that since the law operates prospectively, gratuity is calculated on the last drawn wage if the employee exits after implementation. “This means the higher wage base applies to the entire completed tenure for computation purposes, creating a meaningful uplift in terminal benefits,” he noted.

What is the new eligibility for gratuity?

Agrawal noted that under the Code on Social Security 2020, eligibility rules have also expanded. Here’s how:

• While regular employees generally still require five years of service, Fixed-Term Employees now qualify for gratuity on a pro rata basis after completing only a year of service.

• Additionally, for employees covered under the Act, any service period exceeding six months in their final year is rounded up to a full year for the purpose of the payout calculation.

How much more gratuity will an employee get after the changes?

Agrawal noted that for an employee whose basic pay was historically set at 30% of their CTC, shifting to a 50% wage floor results in a 66% increase in the gratuity payout. He explained that under the new definition of “wages”, if an employee’s sum of allowances exceeds 50% of CTC, the excess is automatically added back to basic pay.

“Because gratuity is calculated based on the ‘last drawn wage’, this requirement effectively establishes a higher legal floor for the payout, increasing the employer’s total liability,” he added.

Pooja Ramchandani, Partner at Shardul Amarchand Mangaldas & Company, concurred that under the earlier legal framework, gratuity was typically computed on basic pay and dearness allowance only. “For a person with ₹12 lakh CTC, if the basic pay is 50,000, special allowance is 20,000, HRA is 15,000 and conveyance is 15,000, wage for gratuity payment under the erstwhile legal regime would be ₹50,000 and gratuity payment would be 1.44 lakh; and under the Labour Code, wage would be ₹70,000 and gratuity would be ₹2,01,923.”

Will the new gratuity rules impact take-home pay and PF?

According to Agrawal, while this shift raises the long-term terminal benefits for the employee, it simultaneously increases the Defined Benefit Obligation (DBO) that companies must provision for on their balance sheets. “It also leads to a reduction in monthly take-home pay, as provident fund (PF) contributions, which are also tied to the wage base, increase alongside the gratuity base,” he added.

Ramchandani added: “Wages for computing PF can be limited to the threshold of ₹15,000 as per the EPF Scheme or the actual basic, where basic is more than ₹15,000. Therefore, in the above illustration, if PF was being contributed at the rate of 12% on basic pay of ₹50,000, such a contribution can continue under the Labour Codes.”

Thus, there could be a significant impact on your in-hand salary, depending on how your current PF deduction is structured. Employers are required to pay up to 12% of your basic pay, and if they already do so, there would likely be little to no change to your PF contribution..

“In the short term, employees may see a lower take-home salary if CTC remains unchanged. In the long term, retirement savings improve meaningfully. The trade-off is between liquidity today and social security tomorrow,” Agrawal added.

He noted that the law directly impacts salary structuring, and if companies maintain the same overall CTC, higher statutory contributions will reduce in-hand salary. “Annual increments and performance bonuses will need to be recalibrated within this framework. The shift is structural, not discretionary. Once salary architecture is realigned, the transition becomes a one-time reset,” he added.

Will new codes also increase your bonus pay?

CA Chandni Anandan, Tax Expert at ClearTax, noted that under the new codes, statutory bonus is also computed on the redefined ‘wages’, subject to the usual eligibility period and monetary ceiling. “Where wages expand due to the 50% CTC rule or broader inclusion of allowances, the bonus‑eligible wage can go up, so for some employees, the absolute bonus amount may increase, even if the percentage remains the same,” she pointed out.

Anandan added that for employers, the minimum bonus percentage and the upper wage ceiling remain unchanged, but the wage‑base expansion “means employees who previously earned a bonus on a low basic may now see slightly higher bonus amounts because the statutory wage base has been broadened under the new Labour Codes”.

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