New Gratuity Rules 2026: Eligibility, Calculation and Payment Rules

Eligibility depends on the employee's employment arrangement and the circumstances in which employment ends.

The Ministry of Labour and Employment has specifically clarified that gratuity for a fixed-term employee becomes payable when the employee renders one year of service from the start of the contract. It has also stated that, in the case of contract labour, the contractor is responsible for gratuity after five years of continuous service.

For an employee covered by the applicable gratuity provisions, the standard calculation is generally:

Gratuity = Last drawn wages × 15/26 × Completed years of service

The calculation considers 15 days' wages for every completed year of service or part thereof exceeding six months, subject to the applicable provisions.

Example of gratuity calculation

Suppose an employee has:

• Last drawn wages: Rs. 75,000 per month
• Completed service: 12 years

The estimated gratuity would be:

Rs. 75,000 × 15 × 12 ÷ 26 = Rs. 5,19,231 approximately

The actual amount can vary depending on the employee's applicable wage components, service period and the legal provisions governing the employment.

For gratuity calculations under the applicable provisions, an employee generally receives gratuity for every completed year of service and for an additional part of a year when that part exceeds six months.

For example:

• 5 years and 4 months → generally counted as 5 years
• 5 years and 7 months → generally counted as 6 years

However, fixed-term employment has specific provisions under the new framework, so eligibility and calculation should be assessed according to the applicable contract and law.

The commonly discussed four-year-and-240-day interpretation should not be presented as a universal rule.

The general statutory provision requires five years of continuous service for gratuity on retirement, resignation or termination, while the law provides exceptions for death and disablement. Fixed-term employees also have a separate one-year provision under the new framework.

Therefore, eligibility for an employee leaving before five years should be assessed based on the applicable employment arrangement and circumstances rather than assuming that four years and 240 days automatically qualifies.

Gratuity becomes payable when the employee's employment ends under circumstances covered by the applicable law.

The employer is responsible for determining the gratuity payable and making the payment within the prescribed period. Employees, nominees and legal heirs can also follow the applicable procedure for claiming gratuity. The Central Rules provide specific timelines for applications, including provisions for delayed applications where sufficient cause is shown.

Gratuity can receive tax exemption subject to the applicable provisions of the Income-tax Act.

For employees covered by the Payment of Gratuity Act, the exemption is generally the least of:

• The gratuity calculated under the applicable formula
• Rs. 20 lakh
• The actual gratuity received

Different rules apply to government employees and employees not covered by the Payment of Gratuity Act. Therefore, the tax treatment should be determined based on the employee's category and the applicable provisions.

The Ministry of Labour and Employment has clarified that gratuity payable after 21 November 2025 is calculated based on the rate of wages last drawn at the time of superannuation, retirement, resignation, death or another applicable event, in accordance with the Code on Social Security, 2020.

This means the transition should not be described simply as calculating pre-21 November 2025 service under the old law and post-21 November 2025 service under the new law.

The revised framework has several implications for employees:

• Greater coverage for fixed-term employees: Eligible fixed-term employees directly engaged by an employer can qualify after one year of service.
• Revised wage definition: Changes in the definition of wages can affect the amount considered for gratuity calculations.
• Protection in specific circumstances: The five-year condition does not apply to cases involving death or disablement.
• Clearer statutory framework: Gratuity is now addressed under the Code on Social Security as part of the broader Labour Code framework.

The gratuity rules in India have changed following the implementation of the Code on Social Security, 2020 from 21 November 2025. The most significant changes include a revised definition of wages and a specific provision allowing eligible fixed-term employees to qualify for gratuity after one year of service.

For most employees covered by the general gratuity provisions, the five-year continuous-service requirement continues to apply for retirement, resignation and other qualifying situations, while death and disablement remain exceptions. The amount is generally calculated using 15 days' wages for every completed year of service, subject to the applicable legal provisions.

Employees can use these rules to understand how their service period and wage structure may affect their eventual gratuity entitlement. Since employment arrangements and tax treatment can differ, the applicable statutory provisions should be considered before making a final calculation.