India’s new labour laws, which came into effect on November 21, 2025, are bringing significant changes to employee benefits, particularly gratuity. With the introduction of the four Labour Codes—on Wages, Industrial Relations, Social Security, and Occupational Safety—employees and employers need to understand the revised definitions and calculations for gratuity, provident fund, and salary structure.

1. What Is Gratuity?

· Gratuity is a statutory benefit paid by an employer to an employee as a token of appreciation for long-term service.

· Typically, it is paid when an employee leaves a company after completing at least 5 years of continuous service.

· The Payment of Gratuity Act, 1972 governs gratuity in india, but the new Labour Codes have updated wage definitions and calculation methods.

2. Key Changes in the Labour Code Affecting Gratuity

1. Revised Definition of Wages:

o Earlier, gratuity was calculated on basic salary + dearness allowance.

o Under the Labour Code, wages now include other components such as bonuses, commissions, and certain allowances, depending on company policy.

2. Impact on Gratuity Payouts:

o Higher defined wages lead to larger gratuity payouts, benefiting long-term employees.

o Employers may also adjust payroll structures to optimize gratuity obligations.

3. Provident Fund (PF) Contributions:

o PF contributions are linked to the revised wage definition.

o Both employer and employee contributions are affected, which can increase overall retirement savings.

3. How to Calculate Gratuity Under the New Rules

The basic formula remains the same, but wage definition changes can alter the final amount:

Gratuity=Last drawn wages×15×Years of Service26\text{Gratuity} = \frac{\text{Last drawn wages} \times 15 \times \text{Years of Service}}{26}Gratuity=26Last drawn wages×15×Years of Service

Where:

· Last drawn wages = Basic + Dearness Allowance + Applicable Allowances (as per Labour Code)

· 15 = Number of days’ wages for each completed year of service

· 26 = Number of working days in a month considered for gratuity

Example: If your last drawn monthly wage (basic + DA + allowances) is ₹50,000 and you have completed 10 years of service:

Gratuity = (50,000 × 15 × 10) ÷ 26 = ₹2,88,461 approximately

4. Who Is Eligible for Gratuity?

· Employees completing 5 or more years of continuous service

· Employees in private and public sectors, as well as government organizations covered under the Act

· Eligibility criteria remain largely unchanged, but payout amounts are influenced by revised wages

5. Benefits for Employees

· Higher gratuity payouts for long-serving employees

· Improved retirement savings due to PF linkages

· Better financial planning with clarity on wage components included in benefits

6. Tips for Employees and Employers

· Employees: Check your salary structure to know which components are included in gratuity calculation.

· Employers: Update payroll systems to comply with Labour Codes and ensure accurate gratuity computation.

· Consider financial planning to manage larger gratuity payouts efficiently.

Conclusion

The new Labour Codes in India have modernized the approach to employee benefits, particularly gratuity. By redefining wages, they ensure fairer payouts for long-term employees and improve retirement benefits via PF contributions. Understanding these changes and using the updated gratuity formula helps both employees and employers adapt smoothly to the new system.

Disclaimer:

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any agency, organization, employer, or company. All information provided is for general informational purposes only. While every effort has been made to ensure accuracy, we make no representations or warranties of any kind, express or implied, about the completeness, reliability, or suitability of the information contained herein. Readers are advised to verify facts and seek professional advice where necessary. Any reliance placed on such information is strictly at the reader’s own risk.