Gratuity Rules for Employers Under the Labour Codes (2026)

The gratuity rules for employers under the Labour Codes are in Chapter V (sections 53 to 58) of the Code on Social Security, 2020, in force since 21 November 2025. Employers must pay 15 days’ wages for every completed year of service (wages × 15 ÷ 26 × years) to regular employees with five years’ continuous service, and pro-rata gratuity to fixed-term employees after one year, up to ₹20 lakh, within 30 days of it becoming payable. The new wage definition, with its 50% rule, makes the base bigger than basic pay for many staff.

Gratuity rules for employers: who must be paid

Gratuity is payable when employment ends after the qualifying service: on superannuation, retirement, resignation, death or disablement due to accident or disease, and, for fixed-term employees, on expiry of the contract. For regular employees, five years of continuous service is the condition, except on death or disablement, where it does not apply. On death, gratuity goes to the nominee, or to the heirs if no nomination exists.

Fixed-term employees qualify after one year of service under the contract. Rule 33 of the Social Security (Central) Rules, 2026 rounds a further period above six months up to an extra year. See fixed term employment under Labour Codes.

How to calculate gratuity on the new wage base

“Wages” for gratuity follow the Code definition: basic pay, DA and retaining allowance, plus any excess where excluded allowances (HRA, conveyance and the like) cross 50% of total remuneration. A fixed special allowance paid to all is usually wages already. Details: 50 percent wage rule.

Worked example (regular employee). Sunil leaves a Lucknow school after 9 years and 4 months. His last monthly wages under the Code are ₹40,000. Four months is not more than six, so he counts 9 years: ₹40,000 × 15 ÷ 26 × 9 = about ₹2,07,692.

Worked example (fixed-term). Nazia’s 2-year-10-month project contract ends with last wages of ₹31,200. Ten months rounds up, so 3 years: ₹31,200 × 15 ÷ 26 × 3 = ₹54,000.

Worked example (death). A machine operator with 3 years’ service dies in service. The five-year condition does not apply on death, so gratuity for 3 years is payable to his nominee.

Timelines, forfeiture and disputes

• Pay within 30 days of gratuity becoming payable (s.56(3)). Delay attracts simple interest (s.56(4)). Put gratuity in the exit checklist with the other dues; earned wages themselves are due within two working days under the Code on Wages.
• Forfeiture is narrow. The Code allows forfeiture to the extent of loss caused by wilful damage to the employer’s property, or wholly or partly where service was terminated for riotous or disorderly conduct, violence, or an offence involving moral turpitude committed in the course of employment. Joining a competitor, a short notice period or an unsigned clearance form is not a ground.
• Disputes go to the competent authority under the Code, which can direct payment with interest.
• Ceiling: ₹20 lakh. Paying more by contract is lawful. Income tax exemption for gratuity is a separate question; for private sector employees the exemption limit is ₹20 lakh over a working life, so ask the finance team before quoting it in letters.

Employer process: provisions, nominations and funding

1. Revalue the liability. Update the actuarial valuation for the Code wage definition and for fixed-term staff, who now accrue from year one.
2. Collect nominations at joining and remind staff to update them after marriage or a birth.
3. Fund it. Many employers use an approved gratuity fund or a group gratuity policy with an insurer. Check whether your appropriate Government requires compulsory insurance and what its rules say.
4. Exit routine. Compute gratuity on the last wages, inform the employee in writing with the calculation, and pay within 30 days.
5. Keep records of service dates, breaks and wage history, since continuous service and wages are what disputes turn on.

Common mistakes under the gratuity rules for employers: calculating on basic pay alone; ignoring fixed-term staff with under five years; withholding gratuity because the employee “did not serve notice”; and dividing by 30 instead of 26. Employees checking their own claim can use gratuity rules: eligibility and calculation.

Frequently asked questions

What are the gratuity rules for employers under the new Labour Codes?

Employers covered by Chapter V of the Code on Social Security, 2020 must pay 15 days’ wages per completed year to regular employees after five years and to fixed-term employees after one year, up to ₹20 lakh. Payment is due within 30 days of becoming payable, with interest on delay.

Can an employer withhold gratuity if the employee did not serve the notice period?

No. The Code allows forfeiture only for loss from wilful damage to the employer’s property, or for termination due to riotous or disorderly conduct, violence or an offence involving moral turpitude in the course of employment. A short notice period is not a ground.

Is gratuity payable to fixed-term employees before five years?

Yes. A fixed-term employee is eligible for pro-rata gratuity after one year of service under the contract. Rule 33 of the Social Security (Central) Rules, 2026 rounds a part-year above six months up to a full year.

Which wages are used to calculate gratuity under the Labour Codes?

The last drawn wages as defined in the Code: basic, DA and retaining allowance, plus any excess of excluded allowances over 50% of total remuneration. The formula is wages × 15 ÷ 26 × completed years.

Quick quiz

Gratuity rules for employers, PF and exit processes are covered in Labour Codes for HR Managers (₹599), a Lexfolio certificate of completion, not a professional qualification.

Sources

• Code on Social Security, 2020: ss.2(88), 53 to 58 (in particular s.56(3) and (4))
• Social Security (Central) Rules, 2026, Rule 33
• Code on Wages, 2019: ss.2(y), 17(2)
• Industrial Relations Code, 2020: s.2(o)

This page is for education and general information, not legal advice for a specific case. Law as on 31 October 2026.