Gratuity and New Labour Codes: What Changes for Indian Employees?

India's four new Labour Codes, when fully implemented, will significantly change how gratuity is calculated and who is eligible. While some states have already begun notifying the rules, the full national implementation is still in progress. Here's what you need to know now.

Current Gratuity Formula (Payment of Gratuity Act 1972)

Gratuity = (Basic salary + DA) × Years of service × 15/26

• 15 = 15 days of wages per year of service
• 26 = working days in a month (26-day month)
• Years rounded: if fractional year > 6 months, round up. <6 months, round down.
• Maximum: ₹20 lakh (tax-exempt)

What the New Labour Code Changes

Aspect	Current Law (1972 Act)	New Labour Code
Eligibility (continuous service)	5 years	May allow: 1 year for fixed-term contracts; 5 years otherwise
Definition of "wages"	Basic + DA	Expanded: 50% of total remuneration (CTC-based)
Monthly salary fraction	26 working days	No change proposed
15-day factor	15/26	No change
Max gratuity	₹20 lakh	No change proposed

The "50% of CTC as Wages" Rule Impact

The most significant proposed change: wages for gratuity purposes will be at least 50% of total CTC. This means companies can no longer artificially keep basic salary at 30% to reduce gratuity obligation.

Impact: For a ₹20L CTC employee:

• Current: Basic = ₹8L/year → Annual gratuity accumulation = 8L × 15/26 = ₹4,615/month
• New Code: Wages = 50% × ₹20L = ₹10L/year → Annual gratuity accumulation = 10L × 15/26 = ₹5,769/month
• Difference per year: ₹13,846 more accumulated

When Can You Get Gratuity Before 5 Years?

Under current law, gratuity before 5 years is payable in case of:

• Death of employee (payable to nominee)
• Total disablement due to accident or disease
• Fixed-term contract employees: on contract expiry even if <5 years
• Seasonal establishments: proportional gratuity

Gratuity Tax Exemption

Gratuity received is tax-exempt up to:

• Government employees: Fully exempt
• Private sector: Minimum of (a) actual gratuity, (b) ₹20 lakh, or (c) 15/26 × last salary × years
• Amount beyond ₹20L or exceeding the formula is taxable as salary