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India’s new labour codes consolidate 29 complex central laws into four streamlined codes and represent a landmark reform in labour laws that govern one of the world’s largest working populations. These codes came into effect on 21 November 2025. Gratuity is now governed by the Social Security Code, replacing the erstwhile Payment of Gratuity Act, 1972, while expanding coverage and reshaping wage-based calculations.
The eligibility criteria largely remain the same for permanent workers. However, the Social Security Code expands the framework by clearly roping in fixed-term employees and also extending the intent of coverage to gig, platform and other previously excluded work arrangements.
A uniform, strict definition of “wages” across all four labour codes introduces the 50% rule. This structural shift changes how salary is composed and can increase the base used for statutory calculations, including gratuity.
The new law introduces a uniform, strict definition of “wages” across all four labour codes. To prevent employers from suppressing statutory contributions by inflating non-wage components, the code mandates that allowances and other non-wage components cannot exceed 50% of the employee’s total monthly gross.
Organizations may continue using the term “Cost to Company”, but within the Social Security Code the Government emphasizes three terms: wages, remuneration and compensation. When defining salary structures, implementation should align with Part A, Part B and Part C of gross wages.
This means that the combined amount of Basic Pay, DA and Retaining Allowance must constitute at least 50% of the total monthly gross wages.
If an employer structures salary with Basic Pay below 50% of remuneration, the excess allowance portion beyond the permitted threshold may be deemed part of “wages” for statutory calculations. This can increase the base on which gratuity is computed, potentially leading to higher gratuity payouts.
This is a significant change for a vast section of the workforce that remained outside gratuity coverage for years, particularly those who moved across jobs and contracts. With the rollout effective 21 November 2025, the change provides a path for excluded categories to become part of gratuity eligibility once they complete 12 months of work in one organisation or as per the longevity of the contract.
Earlier, gratuity was often viewed as a reward enjoyed by those able to complete 5 uninterrupted years in one company, typically the permanent segment of the workforce.
In simple terms, gratuity will no longer feel like a long-term benefit only for “long-term stayers”. The updated approach signals coverage for “short-term stayers” as well, strengthening financial security even for shorter tenures.
Prior to November 2025, gratuity was calculated on basic salary plus dearness allowance (DA). Allowances were mostly excluded from calculation.
The formula remains: last drawn salary multiplied by 15 divided by 26 multiplied by number of years of service, or the relevant duration.
Wages must include at least 50% of total monthly gross. Because the salary base is higher now, the final payout for gratuity is expected to rise significantly.
The 20 lakh cap still remains the same for income tax exemption, however, it remains to be seen if any future change occurs on this front.
It is advisable to ensure nominee details are updated. Employers should prepare for higher actuarial evaluations, given the strengthened wage base and the resulting impact on gratuity provisioning.
The big change in gratuity signals a deeper shift in how India values its workforce, especially the volatile working population. India’s growth trajectory hinges on people and businesses flourishing together, with social security becoming more portable and accessible.
Employment in India rose to 64.33 crore in 2023–24 from 47.5 crore in 2017–18, a net addition of 16.83 crore jobs over six years. The unemployment rate reduced from 6.0% in 2017–18 to 3.2% in 2023–24, and about 1.56 crore women have joined the formal workforce in the past seven years.
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