Gratuity After 1 Year? Who Qualifies Under the New Labour Code 2026, Formula & an Example

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⚡ Quick answer: gratuity under the new Labour Codes

  • In force: the four Labour Codes apply from 21 November 2025; gratuity is now under Section 53 of the Code on Social Security, 2020.
  • Fixed-term employees: eligible after 1 year of service under the contract (regular employees: still 5 years, except death/disablement).
  • 50% wage rule: if excluded allowances (HRA, conveyance etc.) cross 50% of total pay, the excess is added to "wages" — so gratuity can go up.
  • Formula: last-drawn wages × 15/26 × completed years (more than 6 months counts as a full year).
  • Tax: non-government employees get gratuity tax-free up to ₹20 lakh (lifetime); government employees fully exempt.

👀 Eye-opener: your gratuity may be bigger than your HR sheet shows

Many salary structures keep basic pay at 30–40% of CTC. Under the Labour Codes, that trick no longer shrinks gratuity. As per the Labour Ministry's FAQs, the last-drawn wages under the new definition apply to your entire service, not just service after 21 Nov 2025. If HR still uses only basic + DA, you could be underpaid by tens of thousands. For employers, it means a higher gratuity provision in the books this year.

💰 Saver tip: If your gratuity crosses the tax-free limit, the taxable part is still salary — check if you can claim relief for lump-sum/arrear salary (old Section 89, now Section 157 of the Income-tax Act, 2025) by filing the relief form before your ITR.

👥Who gets gratuity under the new Labour Code?

Employee typeMinimum service
Regular (permanent) employee5 years continuous service
Fixed-term employee1 year under the contract
Death or disablementNo minimum
Fixed-term, 11-month contractNot eligible (as per Ministry FAQ)

🧮Gratuity calculation 2026 with the 50% wage rule

Example: Monthly pay ₹1,00,000 = Basic ₹35,000 + HRA, conveyance and other excluded allowances ₹65,000. Service: 8 years.
• 50% of total pay = ₹50,000. Excluded part ₹65,000 exceeds it by ₹15,000 → added back.
• Wages for gratuity = ₹35,000 + ₹15,000 = ₹50,000
• Old way: ₹35,000 × 15/26 × 8 = ₹1,61,538
• New way: ₹50,000 × 15/26 × 8 = ₹2,30,769 → about ₹69,231 more.
Fixed-term staff on ₹40,000 wages after 1 year: ₹40,000 × 15/26 × 1 = ₹23,077.
⚠️ Watch out: "Special allowance" is not in the exclusion list, so it is generally part of wages already. Employers must pay gratuity within 30 days of it becoming payable; delays attract interest.

🧾Is gratuity taxable? Tax-free limit for Tax Year 2026-27

WhoTax treatment (Section 19, Income-tax Act, 2025)
Government employeesFully exempt
Other employeesExempt up to the lowest of: actual gratuity, statutory formula amount, ₹20 lakh (lifetime)
Amount above the limitTaxable as salary (relief may be available)

✅Gratuity checklist: 5 steps for employees and employers

Check your salary slip: add up HRA, conveyance and other excluded allowances. More than 50% of total pay?
Recompute wages as per the 50% rule and use the last-drawn figure.
Fixed-term contract? Note the start date — 1 year triggers eligibility.
Employers: update the gratuity provision/actuarial valuation and the employee nomination records.
At payout: check Form 16/salary TDS for the correct exempt amount and claim relief if eligible.

❓FAQs on gratuity new rules 2026

Is gratuity payable after 1 year for all employees?

No. The 1-year rule is for fixed-term employees. Regular employees still need 5 years of continuous service, except on death or disablement.

Does the new wage definition apply to service before 21 Nov 2025?

As per the Labour Ministry's FAQs, gratuity is computed on last-drawn wages (new definition) for the whole period of service. FAQs are guidance, not a notification, so keep an eye on clarifications.

What is the gratuity tax-free limit in 2026?

₹20 lakh in total over your career for non-government employees. Government employees are fully exempt.

Is gratuity exemption available in the new tax regime?

Yes, the gratuity exemption is generally available under both regimes.

How is gratuity calculated for monthly salary?

Last-drawn wages × 15/26 × completed years of service. A part year above 6 months counts as one year.

🤝 Unsure if your gratuity or salary structure needs a relook? Talk to a Chartered Accountant.

📞 Call 77602 52581

📚 References: Ministry of Labour & Employment (Labour Codes, FAQs) · Income Tax Department
Disclaimer: General information as on 3 Nov 2026, not professional advice; check your facts and the latest notifications before acting.

Location: Bengaluru, Karnataka, India

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