Gratuity Under the Labour Codes: Fixed-Term Staff and the 50% Wage Rule
The labour codes kept the 15/26 gratuity formula but changed who qualifies and which wages count. Two changes matter most: fixed-term staff qualify after one year, and allowances above half your pay are added back.
By BizToolsIndia Editorial Team · Published · 4 min read
Key takeaways
- The labour codes, including the Code on Social Security, 2020, took effect on 21 November 2025.
- The formula is unchanged: 15 × last drawn wages × years of service ÷ 26.
- Fixed-term employees qualify for gratuity after one year of continuous service instead of five.
- If allowances make up more than half of your total pay, the excess is added back to “wages” — which can raise your gratuity.
- The ₹20 lakh ceiling still applies.
What the labour codes changed — and what they didn't
India's four labour codes replaced 29 older labour laws, including the Payment of Gratuity Act, 1972. For gratuity, the Code on Social Security, 2020 carries over most of the old framework. The core formula, the 15-days-per-year entitlement and the statutory ceiling remain the same. Two changes affect how much you get and when:
- Fixed-term employees become eligible after one year of continuous service.
- A uniform definition of wages means allowances above 50% of your total pay are treated as wages.
Change 1: fixed-term employees qualify after one year
Earlier, gratuity usually needed five years of continuous service. That put it out of reach for most contract and project staff. Under the Code on Social Security, a fixed-term employee — someone hired directly by the employer for a fixed period — is entitled to gratuity on a pro-rata basis after one year.
| Service | Years counted | Gratuity |
|---|---|---|
| 1 year | 1 | ₹23,077 |
| 2 years 7 months | 3 | ₹69,231 |
Service of more than six months in the final year counts as a full year, which is why 2 years 7 months is counted as 3. Permanent employees still need five years, except on death or disablement.
Change 2: the 50% wage rule
Many salary structures keep basic pay low and put most of the package in allowances. Since gratuity was calculated on basic + DA only, this reduced it. The codes define “wages” so that if excluded components such as HRA and special allowances exceed 50% of total remuneration, the amount above 50% is added back to wages.
Wages for gratuity = max(Basic + DA, 50% × total monthly remuneration)
| Old basis (basic + DA) | Labour-code basis | |
|---|---|---|
| Wages used | ₹30,000 | ₹40,000 |
| Gratuity (15 × wages × 10 ÷ 26) | ₹1,73,077 | ₹2,30,769 |
In this example, the gratuity rises by about a third. If your basic is already at least half of your pay, nothing changes. The Gratuity Calculator has an optional “total monthly pay” field that applies this rule for you.
Note
What stays the same
- The 15/26 formula for employers covered by the law.
- The ₹20 lakh ceiling on gratuity payable.
- Part-years of more than six months counting as a full year.
- Payment on resignation, retirement, death or disablement once you are eligible.
- Income-tax treatment, which has its own limits and conditions.
For employers: budgeting for gratuity
Many companies show a gratuity provision of about 4.81% of basic in CTC. The figure comes straight from the formula: each year of service earns 15 days' wages, and 15 ÷ 26 of a month's wages is 57.7% of one month — spread over 12 months, that is 4.81% of annual wages.
Annual gratuity accrual = (15 ÷ 26) × monthly wages
= 0.577 × monthly wages ≈ 4.81% of annual wages
- With fixed-term staff now eligible after one year, contracts of 12 months or more create a gratuity liability — budget for it from day one.
- If the 50% wage rule raises wages for your salary structures, the provision should be calculated on the higher wage base.
- Review salary structures where allowances exceed half of pay; they affect PF and other contributions under the codes as well as gratuity.
How to estimate your gratuity
- Find your last drawn basic + DA and your total monthly pay from your payslip.
- Count completed years and the extra months in the final year.
- Enter both in the Gratuity Calculator and choose permanent or fixed-term.
- Read how gratuity is calculated for the full rules and more examples.
Frequently asked questions
From when do the new gratuity rules apply?
The labour codes came into force on 21 November 2025. How they apply to service before that date can depend on the transitional rules; check with your employer.
Is the gratuity formula different under the labour codes?
No. It is still 15 days' wages for each completed year of service, with a month taken as 26 working days.
Do contract workers hired through an agency get gratuity after one year?
The one-year rule is for fixed-term employees hired directly by the employer. Workers engaged through a contractor are covered by different provisions; check your contract.
Is there still a ₹20 lakh limit?
Yes, gratuity payable under the law is capped at ₹20 lakh. Employers may pay more by contract.