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Gratuity payment in 2026: What's changing for employees under new laws?
4 min read | Updated on January 07, 2026, 08:18 IST
SUMMARY
Gratuity payment 2026: The benefit of gratuity after 1 year of service is not available to permanent employees. They can receive gratuity payment only after five years of continuous service as earlier.
The benefit of gratuity payment after 1 year of service is not available to permanent employees. | Image source: Shutterstock
The four labour codes are expected to be fully implemented soon in 2026. The new rules have revised the definition of wages, which may lead to higher contribution towards social security benefits like gratuity and provident fund for some employees.
What's changing for employees?
| Aspect | Old rule | New rule (labour codes) | Who is affected | Likely impact |
|---|---|---|---|---|
| Definition of wages for social security contributions | Wages could be less than 50% of total remuneration; components varied across employers | Minimum 50% of total remuneration must be basic pay + dearness allowance + retaining allowance; if current wages are lower, they are deemed to be 50% for contribution calculations | All employees | Higher contributions and potentially higher gratuity, provident fund and pension; employer payroll costs may rise |
| Gratuity calculation base | Gratuity calculated on last drawn wages (as per the Payment of Gratuity Act, 1972) | Gratuity must be calculated on last drawn wages that are at least 50% of total remuneration | All employees | Higher gratuity payout where wage base rises to ≥50% of remuneration |
| Gratuity eligibility for fixed-term/contract employees | Payable only after 5 years of continuous service | Eligible after completing 1 year of service | Fixed-term/contract employees | Earlier access to gratuity benefits |
| Gratuity eligibility for permanent employees | Payable after 5 years of continuous service | No change: still 5 years of continuous service | Permanent employees | Status quo |
First change is about the computation of wages for determining the contributions towards social security benefits provided to employees.
Under the new labour laws, minimum 50% of total remuneration of an employee should include three components:
-
Basic Pay
-
Dearness Allowance
-
Retaining allowance
The three components above are collectively referred to as ‘Wages’.
Further, the new codes mandate that if the current wages are lower than 50% of total remuneration, then it should be presumed that wages constitute 50% of total remuneration for calculation of contribution towards social security benefits such as gratuity, pension and provident fund.
ICAI says, "The new Labour Codes have subsumed the Payment of Gratuity Act, 1972 and they require gratuity payment to all employees to be calculated based on last drawn wages which should be minimum 50% of total remuneration."
Second, is about payment of gratuity itself.
There is one change that has led to confusion among many employees. The following will give you some clarity:
The new rules mandate payment of gratuity after completing just one year of service to fixed-term employees, including employees hired on contract.
The benefit of gratuity payment after 1 year of service is not available to permanent employees. This means permanent employees of a company can receive gratuity payment only after five years of continuous service as earlier.
"Earlier gratuity was payable to an employee if and only if an employee has completed five years of continuous service. Under the new Labour Codes, fixed term employees (which include contracted employees) will be entitled to gratuity on completing one year of service. There is no change in requirement of five years of continuous service requirement for permanent employees," ICAI says.
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