Gratuity calculation for salaried employees in 2026: 10 essential FAQs you need to know

As employers prepare to implement various provisions of the new labour codes in the new financial year beginning April 1, there is considerable confusion among employees regarding gratuity provisions. At the root of these confusions lie two issues:

The labour codes have mandated that 50% of the total contribution must be considered as wages for calculating statutory benefits. To date, many employers have considered only 30-40% of compensation wages for this purpose. The implementation of the revised definition of wages means a large number of employees may see higher statutory contributions, which in turn would result a lower in-hand pay.

Second, the date of implementation of the new definition of wages. While the labour codes were notified on November 21, 2025, there is still confusion about the date from which the new provisions are applicable.

This article answers important queries related to gratuity calculation to help you understand the new provisions, with inputs from a set of FAQs recently released by the Union Ministry of Labour and Employment.

Answer: There is not much change in gratuity payment rules for most employees, except for fixed-term employees.

As per the code on social security, gratuity must be paid to an employee on termination of his employment after completing at least five years of continuous service. The termination must be due to superannuation, retirement or resignation, death or disablement due to accident or disease, or any other event notified by the Central Government.

For fixed-term employees, employers are required to pay gratuity on termination of their contract period after completion of one year of service.

Employees who have completed one year of service are required to make a nomination within the time limit set by the government.

Answer: Gratuity must be paid at the rate of 15 days’ wages for each completed year of service, subject to the maximum limit notified by the Central Government. The maximum limit currently for tax-free gratuity is ₹20 lakh for private employees and ₹25 lakh for central government employees.

Answer: An employer must pay the amount of gratuity within 30 days from the date it becomes payable.

Answer: Any payment made to an employee that is not part of the components mentioned under section 2(88) of the Code on Social Security, 2020, shall not be considered for the calculation of gratuity.

As per Section 2(88) of the Code on Social Security, 2020, “wages” means "all remuneration, whether by way of salaries, allowances or otherwise, expressed in terms of money or capable of being so expressed which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment..."

Here's what is included and what's excluded:

Answer: Yes. Gratuity, based on the revised definition of wages, will be applicable with effect from November 21, 2025, i.e. the date of implementation of the Codes

Answer: Gratuity calculation will be applicable with effect from November 21, 2025.

Answer: As per section 53 of the Code on Social Security, 2020, the employer (i.e. Contractor) will pay gratuity on rendering of five years continuous service at the rate of 15 days wages for each completed year of service based on the last drawn wages.

Answer: The employee will be paid gratuity based on the rate of wages last drawn by the employee at the time of superannuation or retirement or resignation or death etc, on and after November 21, 2025 as per the provisions of Code on Social Security, 2020.

Answer: No. Fixed Term Employee (FTE) will be eligible for gratuity if he/she renders service under the contract for a period of one year from the start of the contract.

Answer: Yes. Overtime allowance payment forms a part of the 50% percent wage calculation.