The Gratuity laws in India were changed in 2026, considering the enactment of new labour codes. These amendments affect the rate of calculation of gratuity and eligibility. What is new, particularly regarding eligibility, the definition, and the calculation of wages, is a source of confusion for many employers and employees.
What is Gratuity?
Gratuity is a programmed retirement payment of an employer to an employee as a result of his/her service. It falls under the category of payments payable when an employee leaves the job by resignation, retirement, death, or disability. Gratuity is also a monetary cushion for an employee, as provided under Indian labour laws, whenever an employee terminates his or her service. Under the law, employers are expected to provide gratuity.
How Gratuity Worked Before 2026?
Until the labour legislation restructuring, the eligibility for the gratuity was simple:
- The employees were allowed to receive gratuity only after serving a period of five years.
- The amount of gratuity was computed in accordance with the formula of the Payment of Gratuity Act, 1972, which is based on the last drawn wages (basic pay plus dearness allowance).
This implied that you did not usually qualify to receive gratuity in the event that you retired from the job before you had five consecutive years of service, regardless of whether you were a long-term contract worker.
The Reason Behind the Introduced Change
The government amalgamated 29 existing labour laws into four homogeneous Labour Codes, which will be effective after November 21, 2025, in a bid to modernise India’s highly fragmented labour law system. This was also a significant reform that updated social security benefits such as gratuity, provident fund, and pension, focusing on inclusion, transparency, and fairness.
The reforms are meant to safeguard more employees – particularly those in fixed-term or contract employment – and align labour laws in India with emerging work trends.
What’s Changing for Employees in 2026?
The 2026 updates affect two significant areas of gratuity: eligibility and the calculation basis.
Below is a simple comparison of what’s different under the new labour codes:
| Aspect | Old Rule | New Rule (Labour Codes 2025/26) |
| Definition of wages for gratuity | Based on basic pay and dearness allowance only | Minimum 50% of total remuneration must include basic pay + DA + retaining allowance (if needed) for gratuity and social security calculations |
| Gratuity calculation base | Last drawn wages under the Payment of Gratuity Act, 1972 | Last drawn wages, which must be at least 50% of total remuneration |
| Eligibility — fixed-term/contract workers | Must complete 5 years of continuous service | Eligible after 1 year of continuous service on a proportionate basis |
| Eligibility — permanent employees | Must complete 5 years of continuous service | Still 5 years for permanent employees |
What do These Changes Mean?
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The Salaries are redefined to benefit better
According to the new codes, the definition of wages in calculating the gratuity and other social security benefits can be subject to more items of your total remuneration, as long as at least half of your total remuneration is regarded as basic pay + dearness allowance + retiring allowance. Otherwise, the code considers it to be 50%. This shift can lead to increased gratuity at a time when a wage can take a greater part of your salary.
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Employees who are on Contract and Fixed-Term are at an advantage
Prior to this, the practice was common with fixed-term or contract employees, who, even after many years of service in various projects, would not receive gratuity benefits unless they stayed with one employer through five consecutive years. These employees are now made eligible to gratuity by simply serving one year in continuous service and are granted such gratuity on a proportional basis, which is a great enhancement.
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Permanent Employee Rules do not change
Under the new law, the eligibility to hold five years of continuous service is the same as before for permanent employees. It implies that ordinary employees must have served for 5 years before they can receive gratuity.
How is Gratuity Paid after Leaving a Job?
The Labour Code FAQs state that gratuity is payable for a number of events, including termination, retirement, resignation, disability, or death during service. You receive a proportional gratuity if you fulfil the qualifying period but leave short of the longer periods.
The new regulations also embrace high rates of conformity and disclosure, such as quicker total and final settlement of gratuity payments upon leaving work.
Things Employees Should Know in 2026
- Understand your Salary Structure: Gratuity calculations can also be contingent on the definition of wages after the Labour Code is put in effect, so it is best to know what is considered as wages in your CTC (Cost to Company) and the structure of allowances.
- Monitor Duration of service Care: When you are contracted or have been employed on a series of fixed-term contracts, make sure you maintain records of uninterrupted service so that you can receive early gratuity benefits.
- Check Full and Final Settlement: In case of changing jobs or retirement, ensure that your gratuity is calculated according to the new rules and that, where necessary, the employer has used the new definition of wage.
Conclusion
The new 2026 gratuity reforms are an important change from the old rules, especially for fixed and contractual employees, who now qualify to receive gratuity with only one year of continuous service, and the wage base on which the computation is done has been expanded. Although permanent employees are still bound by the five-year rule, the new legislation aims to make gratuity more inclusive and fair. Knowledge of these updates helps employees retire benefits, negotiate employment terms, and protect their social security benefits in a dynamic labour market.
You can have me help you calculate your gratuity or get personal financial planning suggestions, either way.
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