India’s labour law framework has undergone one of its most significant overhauls in decades with the implementation of four comprehensive labour codes — the Code on Wages, Industrial Relations Code, Code on Social Security, and Occupational Safety, health & Working Conditions Code. These came into force on 21 November 2025, replacing 29 older laws with a modernised, streamlined structure.

Among the many changes introduced, the revised rules for gratuity — a key long‑term service benefit — have attracted widespread attention from employees, employers and HR professionals alike.

What Is Gratuity and Why It Matters

Gratuity is a statutory benefit paid by employers to employees upon the termination of employment — whether due to retirement, resignation, death or disablement. Traditionally governed by the Payment of Gratuity Act, 1972, it has been an important part of retirement planning for workers in India.

Under the new labour codes, gratuity rules have been modernised and expanded to cover a broader category of workers and simplify eligibility and calculation.

Implementation Timeline: When the New Gratuity Rules Apply

One of the biggest points of confusion — among companies and employees alike — has been when the new gratuity rules actually start applying.

Effective Date: 21 November 2025

The government has officially clarified that the updated gratuity provisions under the new labour codes apply prospectively from 21 November 2025 — the date when the codes were first enforced.

This means:

• Employers and employees should follow the new rules only for service and wages from this date onward.
• No retrospective recalculation of gratuity for past years of service is required — older periods are governed by the previous law.

The confusion arose because draft rules for implementing the codes were published later in december 2025, and the full operational rollout extended into early 2026.

Key Changes to Gratuity Rules Under the New Labour Codes

1. Expanded Coverage: Fixed‑Term and contract Employees

Under the new framework:

• Fixed‑term employees — who previously did not get gratuity unless they completed five years — now become eligible after just 1 year of continuous service.
• This significantly benefits workers on contracts or project‑related employment.

This change data-aligns gratuity more with changing work patterns and reduces the bar for a statutory benefit that was traditionally only available to long‑tenured workers.

2. Revised Definition of “Wages” for Calculation

The new labour codes use a standardised wage definition across all four laws, which affects how gratuity (and other benefits like PF) is calculated. According to the updated rule:

• “Wages” now include basic pay, dearness allowance and retaining allowance, with additional components added back if total allowances exceed 50% of remuneration.

This broader definition often increases the base on which gratuity is calculated, potentially raising the payout amount for employees.

3. Calculation and Payment Timelines

While the fundamental idea of paying 15 days’ wages for each year of service remains, the revised codes:

• Mandate gratuity to be paid on termination or exit from employment under qualifying conditions.
• Require employers to make reasonable accounting provisions from the effective date onward.

The law continues to provide protection in cases of death or disablement, and existing maximum limits on gratuity payouts (currently up to ₹20 lakhs) continue to be subject to future notifications.

What Remains Unchanged

Despite the reform:

• Gratuity entitlement for regular permanent employees generally remains based on the five‑year service threshold of continuous employment. The 1‑year eligibility is primarily for special categories like fixed‑term employees.
• Gratuity payments should be made within statutory timelines after separation, although delayed payment could attract interest under other existing provisions if applicable.

Implications for Employers and Employees

The new gratuity rules have both benefit and compliance implications:

For Employers

• Accounting provisions need to be updated from the effective date.
• Salary components and remuneration structures may need revision to data-align with the new wage definition — which affects PF and gratuity calculations.

For Employees

• Workers on fixed‑term contracts benefit from earlier eligibility.
• Standardised wage calculation can yield higher gratuity payouts in many cases.

However, employees must ensure that employment status and eligibility conditions are clearly understood before assuming gratuity entitlement.

Conclusion: A Big Step Toward Inclusive Worker Benefits

The 2026 phase of India’s labour law reform — building on codes enforced from november 2025 — marks a significant shift in how legacy benefits like gratuity are structured and calculated. By expanding eligibility, simplifying definition of wages, and clarifying implementation timelines, the government aims to modernise worker protections and make statutory benefits more fair, accessible, and relevant to today’s employment landscape.

 

Disclaimer:

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any agency, organization, employer, or company. All information provided is for general informational purposes only. While every effort has been made to ensure accuracy, we make no representations or warranties of any kind, express or implied, about the completeness, reliability, or suitability of the information contained herein. Readers are advised to verify facts and seek professional advice where necessary. Any reliance placed on such information is strictly at the reader’s own risk.