The Government of India’s New Labour Codes, effective from November 21, 2025, have fundamentally transformed how gratuity is calculated and paid to employees. The consolidation of 29 labour legislations into four unified codes has introduced significant changes that will increase gratuity liabilities for most organizations across India.
This comprehensive guide explains the new gratuity calculation methodology, helping employers, HR professionals, and finance teams understand and implement these changes correctly.
What Changed in Gratuity Calculation?
The New Labour Codes have subsumed the Payment of Gratuity Act, 1972, introducing two major changes:
1. Wage Definition Mandate The codes now require that gratuity must be calculated based on “wages,” which must constitute at least 50% of total remuneration.
2. Expanded Coverage Fixed-term and contract employees now become eligible for gratuity after just one year of service, compared to the previous five-year requirement for all employees.
Understanding the 50% Wage Component Rule
What Constitutes “Wages”?
Under the New Labour Codes, “Wages” specifically include three components:
- Basic Pay
- Dearness Allowance (DA)
- Retaining Allowance
The Minimum 50% Requirement
The codes mandate that these three wage components must equal at least 50% of an employee’s total remuneration. If your current salary structure shows wages below 50%, the law presumes wages to be 50% for gratuity calculation purposes.
Example:
- Total monthly remuneration: ₹1,00,000
- Current wage components (Basic + DA): ₹35,000 (35%)
- For gratuity calculation: Deemed wages = ₹50,000 (50%)
Old vs New Gratuity Calculation Formula
Old Method (Before November 21, 2025)
Formula:
Gratuity = (Last drawn salary × 15 × Years of service) / 26Where “last drawn salary” typically included only basic salary and dearness allowance.
Example:
- Basic + DA: ₹40,000
- Years of service: 10 years
- Gratuity = (₹40,000 × 15 × 10) / 26 = ₹2,30,769
New Method (From November 21, 2025 onwards)
Formula:
Gratuity = (Last drawn wages × 15 × Years of service) / 26Where “last drawn wages” must be minimum 50% of total remuneration.
Same Employee Under New Rules:
- Total remuneration: ₹1,00,000
- Minimum wages (50%): ₹50,000
- Years of service: 10 years
- Gratuity = (₹50,000 × 15 × 10) / 26 = ₹2,88,462
Increase: ₹57,693 (25% higher)
Step-by-Step Gratuity Calculation Under New Codes
Step 1: Calculate Total Monthly Remuneration
Add all components:
- Basic salary
- Dearness allowance
- House Rent Allowance (HRA)
- Special allowances
- Performance bonuses
- Other benefits
Example: ₹1,20,000 per month
Step 2: Identify Current Wage Components
Calculate existing basic pay, DA, and retaining allowance.
Example: ₹45,000 (37.5% of total)
Step 3: Apply the 50% Rule
Compare current wages with 50% of total remuneration:
- If wages ≥ 50%: Use actual wages
- If wages < 50%: Use 50% of total remuneration
Example: ₹45,000 < ₹60,000, therefore use ₹60,000
Step 4: Calculate Completed Years of Service
Count full years of continuous service as of the employee’s last working day.
Example: 8 years and 7 months = 8 years (for gratuity)
Step 5: Apply the Gratuity Formula
Gratuity = (₹60,000 × 15 × 8) / 26 = ₹2,76,923Impact on Different Employee Categories
Permanent Employees
Eligibility: Remains unchanged at 5 years of continuous service
Impact: Increased gratuity amount due to higher wage base
Example:
- Employee with 15 years of service
- Old calculation base: ₹35,000
- New calculation base: ₹60,000
- Additional liability: ₹1,44,231
Fixed-Term/Contract Employees
Eligibility: Changed from 5 years to just 1 year of service
Impact: More employees qualify + higher calculation base
Example:
- Contract employee with 2 years of service
- Previously: Not eligible (₹0)
- Now: (₹50,000 × 15 × 2) / 26 = ₹57,692
Calculating Increased Liability for Your Organization
Method 1: Individual Employee Calculation
For each eligible employee:
- Calculate gratuity under old rules
- Calculate gratuity under new rules
- Find the difference
- Sum up for all employees
Method 2: Actuarial Valuation
Engage an actuary to:
- Project future service years
- Apply demographic assumptions
- Factor in salary growth rates
- Calculate total present value of increased obligation
Common Scenarios and Calculations
Scenario 1: High Basic Pay Structure
Current structure:
- Total remuneration: ₹80,000
- Basic + DA: ₹50,000 (62.5%)
Impact: Minimal, as wages already exceed 50%
Scenario 2: Low Basic Pay Structure
Current structure:
- Total remuneration: ₹1,50,000
- Basic + DA: ₹45,000 (30%)
Impact: Significant increase from ₹45,000 to ₹75,000 wage base Percentage increase in gratuity: 66.67%
Scenario 3: Multiple Allowances Structure
Current structure:
- Total remuneration: ₹2,00,000
- Basic: ₹30,000 (15%)
- DA: ₹10,000 (5%)
- HRA + Other allowances: ₹1,60,000 (80%)
Impact: Wage base increases from ₹40,000 to ₹1,00,000 Percentage increase in gratuity: 150%
Special Considerations
Maximum Gratuity Limit
The statutory ceiling of ₹20 lakhs on gratuity payment remains unchanged under the New Labour Codes. However, companies can offer higher gratuity through their own schemes.
Part-Time and Seasonal Workers
The calculation methodology applies to all categories of workers covered under the codes, with proportionate adjustments based on actual working days.
Employees Joining Mid-Year
For employees joining during a financial year, gratuity calculation considers only completed years of service from the date of joining.
Industry-Wise Impact Analysis
IT and Services Sector
Typical structure: 40-45% basic pay Expected increase: 20-30% in gratuity liability
Manufacturing Sector
Typical structure: 50-60% basic pay Expected increase: 0-15% in gratuity liability
Retail and Hospitality
Typical structure: 30-35% basic pay Expected increase: 40-50% in gratuity liability
Calculation Tools and Resources
Excel Formula Template
=((Total_Remuneration*0.5)*15*Years_of_Service)/26Where:
- Total_Remuneration = Cell reference for monthly salary
- Years_of_Service = Completed years
- Result = Gratuity amount payable
Key Variables to Track
- Employee ID and name
- Date of joining
- Current total remuneration
- Current wage components
- Revised wage base (minimum 50%)
- Completed years of service
- Old gratuity amount
- New gratuity amount
- Incremental liability
Practical Implementation Checklist
- Audit current salary structures across all employees
- Identify employees with wages below 50% threshold
- Calculate revised wage base for each employee
- Compute incremental gratuity liability
- Update payroll systems with new calculation logic
- Train HR and finance teams on new methodology
- Engage actuaries for liability valuation
- Review funding arrangements for gratuity trust
- Update employee communication materials
- Ensure compliance from November 21, 2025
Conclusion
The New Labour Codes have significantly altered gratuity calculation in India by mandating a minimum 50% wage component. Organizations must recalculate their gratuity liabilities, with most expecting increases ranging from 20% to 150% depending on their current salary structures.
Understanding these changes is crucial for accurate financial planning, budgeting, and compliance. Companies should conduct comprehensive audits of their current structures and engage with actuaries and legal advisors to ensure smooth implementation.