Gratuity Calculation in India Under the New Wage Rules From 21 November 2025

If you are looking for a gratuity calculation for India under the new wage rules, the short answer is this. The formula stayed the same. The wage figure you plug into it did not. Since the four Labour Codes took effect on 21 November 2025, the base for gratuity is a single, wider definition of wages. Most employers who structured salaries with a low basic and high allowances will see the base rise. Use the free calculator on this page to test your own numbers, then read the cases below, because the calculator cannot tell you whether a particular employee is eligible.

The rule and its legal source

The Ministry of Labour and Employment notified the four Labour Codes with effect from 21 November 2025. These are the Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020, and the Occupational Safety, Health and Working Conditions Code, 2020. Together they replace 29 older central labour laws. The Payment of Gratuity Act, 1972 is among the laws repealed, and gratuity now falls under Chapter V of the Code on Social Security, 2020. The operative sections for gratuity are Sections 53 to 58, and Section 53 is the one most readers need.

The core payment rule has not moved. A covered employee who leaves after five years of continuous service receives 15 days of wages for every completed year. The arithmetic is last drawn wages multiplied by 15, multiplied by completed years, then divided by 26. The number 26 stands for the working days in a month once weekly offs are excluded. A part year of more than six months is commonly rounded up to a full year, so check that point against your payroll policy.

The statutory ceiling is ₹20 lakh. That figure was set through the 2018 amendment to the Payment of Gratuity Act and has been carried forward. Gratuity must be paid within 30 days of becoming due, and delayed payment attracts simple interest.

The new wage base, side by side

The change is in the wage definition. Under the uniform definition in the Code on Wages, 2019 (section 2(y)), wages cover basic pay, dearness allowance and, where it applies, retaining allowance. Other allowances such as house rent allowance, conveyance, special allowance and overtime sit outside wages. There is one guardrail. If the excluded items together make up more than 50 percent of total remuneration, the excess is added back into wages. In practice, basic pay plus DA plus retaining allowance has to come to at least half of the total pay package.

The table below sets out the two positions. The formula column is identical in both.

How the figure is worked out, step by step

Start with the employee's last drawn monthly wages. For a monthly-paid employee, this is the wage in the last month, under the new definition. Do not start with CTC. CTC is only the input for the 50 percent test.

Next, add up every allowance that falls outside wages. Compare that total with 50 percent of total monthly remuneration. If the excluded total is higher, move the difference into wages. The result is the wage base.

Then count completed years of continuous service. Ignore the months left over, unless the rounding rule in your policy or the adviser's reading of the Code applies. Multiply the wage base by 15 and by the completed years. Divide the result by 26. Compare the answer with ₹20 lakh and use the lower figure as the payable amount.

Finally, check the separation reason and the contract type, because those decide whether any payment is due at all. Those points are covered below.

One worked example with real numbers

Take an employee on a monthly cost to company of ₹1,00,000 who has completed eight years of continuous service on a permanent contract. Under the old structure, basic pay plus DA was ₹40,000 and allowances were ₹60,000. Gratuity was based on ₹40,000.

Under the new definition, the allowances of ₹60,000 are more than 50 percent of ₹1,00,000. The excess is ₹10,000 (₹60,000 minus ₹50,000). That excess is added to wages. The new wage base is ₹40,000 plus ₹10,000, which is ₹50,000.

Old basis: ₹40,000 × 15 × 8 ÷ 26 = ₹1,84,615, rounded. New basis: ₹50,000 × 15 × 8 ÷ 26 = ₹2,30,769, rounded. The difference is about ₹46,154 for this one employee. The gap grows with every year of service, and it is the main reason payroll teams need to re-run old files.

Now the same rules for a fixed-term employee on a one-year contract who works at least 240 days. Their wage base is ₹50,000. One completed year gives ₹50,000 × 15 × 1 ÷ 26, which is about ₹28,846. Under the code, this is paid pro rata for the period served, and the adviser should confirm how any part year is treated.

The cases that change the answer

Resignation, retirement and termination only trigger gratuity if the five-year or one-year test is met. An employee who resigns after four years on a permanent contract is not yet eligible under the statutory rule, even if the employer's internal policy pays earlier. Check your own policy too, because a company scheme can pay more than the law requires.

Death and disablement are different. The five-year condition does not apply, and gratuity is payable regardless of how long the person served. A nominee usually receives the payment in that case.

Contract type matters. A fixed-term employee becomes eligible after one year of continuous service, not five. Before 21 November 2025 most fixed-term staff rarely reached five years, so many employers did not provide for gratuity. Those staff now need to be counted in your provisioning.

Coverage matters too. The gratuity provisions apply to factories, mines, oilfields, plantations, ports and railway companies. They also apply to shops and establishments with 10 or more employees on any day in the preceding 12 months, and to any establishment the government notifies. A business below that size may not be covered by the statutory scheme, but it should still check its contracts for any promised benefit.

Forfeiture is narrow. Gratuity can be reduced or withheld only in the limited cases set out in Section 53, such as loss caused by specified misconduct, or certain violent conduct or an offence involving moral turpitude during employment. An employer should not treat forfeiture as a default penalty for resignation or for a poor performance review.

Tax treatment is a separate question. The ₹20 lakh figure is also the usual tax exemption limit for private employees, and the exemption is found in the Income-tax Act, 2025 under the section that replaced section 10(10) of the earlier Act. Your payroll adviser should confirm this for each payout.

Common mistakes

The most frequent error is to keep the old wage base in the payroll system. The formula looks the same, so the file is often not flagged. Re-run the wage base for every active employee, not only new joiners.

The second mistake is to test the 50 percent rule against basic pay alone. The test uses total remuneration, and the excess is added to wages. Basic pay on its own may look low even when the structure is compliant.

The third is to ignore fixed-term staff who were hired before 21 November 2025. Their service counts from the start of their contract, and the one-year test is easy to miss in a spreadsheet.

The fourth is to pay late. The code requires payment within 30 days of the amount falling due, and delay carries simple interest.

The fifth is to assume the rules are fully settled. The Ministry's press release said existing rules would stay in force during a transition. Commentators differ on how far that transition runs, and the Code's rules are still being framed. Some states also have their own rules to notify. Treat the wage definition as final, but treat the procedural detail as something to confirm.

What to check with HR or a lawyer

Before you run any figure for a live payout, work through this list with your HR lead and payroll adviser.

• Confirm whether the establishment is covered, based on headcount and type of business.
• Pull each employee's last drawn wages under the new definition, and record the 50 percent test result.
• Mark which staff are permanent and which are fixed-term, and check each contract's start date and continuous service.
• Check whether any separation involves death, disablement or possible misconduct, because each triggers a different path.
• Confirm the completed-years count and the rounding rule used for part years.
• Check the ₹20 lakh ceiling and the tax treatment of each payout with a qualified adviser.
• Confirm the payment date and the interest exposure for any late settlement.
• Ask the adviser whether any state rules change the calculation for your staff.

HR and payroll should confirm these figures with their payroll adviser before paying. This page explains the rule, but it does not replace a legal opinion on your own contracts.

How employers take the routine work off their staff

Recalculating wage bases, tracking continuous service for every fixed-term contract, and checking payment deadlines are repetitive tasks that tend to be done by hand, once a year, in a spreadsheet. AI workers can run these checks on a schedule. They can pull salary components from payroll, apply the 50 percent test, flag staff who have reached one or five years, and prepare a draft settlement sheet for a person to approve. The person still decides the outcome and signs the payout.