Gratuity under the new labour codes: who gets it and how much
Gratuity after 1 year for fixed-term staff, the 50% wage rule, the 15/26 formula and the ₹20 lakh tax-free limit, explained for 2026.
Try it: Gratuity calculatorWork out gratuity with the 15/26 formula, check eligibility after 5 years or 1 year for fixed-term staff, and see how much is tax free.Gratuity is a lump sum your employer pays when you leave after enough years of service. The four labour codes came into force on 21 November 2025, and the Code on Social Security brought the gratuity rules into it with a few changes that matter.
How much
For an employer covered by the law, gratuity is 15 days' wages for every year of service, with a month treated as 26 working days:
last basic pay plus DA × 15 ÷ 26 × years of service
If you worked more than 6 months in your last year, that year counts in full. On a last basic of ₹50,000 with 8 years and 7 months, that is ₹50,000 × 15 ÷ 26 × 9 = ₹2,59,615. Under the old Gratuity Act an employer had to pay at most ₹20 lakh; the Code lets the government set this ceiling, and we could not find a new figure notified under it as of October 2026.
Who qualifies
- Permanent employees: 5 years of continuous service. Some court rulings have counted 4 years and 240 days as enough; this comes from case law, not the Code. The 5 years do not apply if you die or are disabled.
- Fixed-term employees: after 1 year, pro rata. This is new with the codes.
The 50% wage rule
The codes define wages so that allowances can be at most half of your total pay. If your basic plus DA was a small share of your pay, the excess allowances are now counted as wages. That raises gratuity, and PF too. Many employers have restructured salaries so that basic is about half of CTC.
When it is paid
Within 30 days of becoming due, usually your last working day. Late payment carries interest.
Tax
Private-sector employees can receive up to ₹20 lakh of gratuity tax free in their working life, across all employers. Anything above is taxed as salary. Government employees pay no tax on gratuity.
In your CTC
Many offer letters show a gratuity provision of about 4.81% of basic pay. That is 15 ÷ 26 ÷ 12. You do not get it each month; you get gratuity only when you qualify and leave. The salary calculator shows how it affects take-home pay.
Sources: Code on Social Security, 2020, EY: labour codes in force from 21 November 2025, Fisher Phillips: labour codes and gratuity, Aditya Birla Capital: gratuity tax limits.
This is general information, not legal advice. Your contract and your employer's policy decide what you are paid.
Rules, rates and limits change. Check the official source linked above before you rely on a figure here. Posts never contain referral or affiliate links from the writer.
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