New Gratuity Rules Under the Labour Code 2025: What Employers Must Know

If you are an employer, HR manager, or payroll professional in India, the new Labour Codes that came into effect on 21 November 2025 directly change how gratuity is calculated and who qualifies for it. Acting now is not optional — non-compliance carries legal and financial risk.

This guide covers exactly what has changed, what it means for your payroll and contracts, and the specific steps your organisation needs to take immediately.

Key Updates Under the New Labour Codes

• Fixed-term and contract employees are now eligible for gratuity after just 1 year of continuous service, down from the previous 5-year requirement. This significantly widens social security coverage for non-permanent workers.
• The definition of "wages" used for gratuity calculations has been broadened, which may increase gratuity payouts in many cases. Employers must re-examine both past and future gratuity liabilities.
• The 50% basic wage benchmark under the new wage-structure rules affects statutory contributions including PF and gratuity. Re-structuring basic pay and allowances to meet wage code requirements can change employees' take-home pay and increase employer and employee PF contributions.
• Effective date: 21 November 2025. Organisations must act now to update payroll, accounting for past-service treatment, and HR policies.

What This Means for Employers

• Recalculate gratuity liability under the revised wage definition and eligibility rules. This may increase current and past liabilities and has accounting implications for how past-service gratuity is treated.
• Update payroll templates and employment contracts for fixed-term and contract staff to reflect gratuity eligibility after 1 year of service.
• Communicate changes clearly to staff: explain the impact on take-home pay where basic pay increases, and how long-term retirement benefits improve.

What This Means for Employees

• More workers — including many on fixed-term and contract arrangements — will now qualify for gratuity sooner, strengthening retirement and welfare benefits.
• If your basic wage increases as part of your employer's compliance restructuring, PF contributions will increase and monthly take-home pay may reduce marginally. However, long-term retirement savings improve as a result.
• Your CTC does not change. Only the salary breakup may change to comply with the new wage regulations.

Recommended Next Steps

1. Carry out a payroll impact assessment and recalculate gratuity liabilities under the updated wage definition and eligibility rules.
2. Review all employment contracts for fixed-term and contract workers and update them to reflect gratuity eligibility after 1 year of continuous service.
3. Issue a clear communication to employees — including a FAQ and worked examples — explaining the impact on take-home pay versus long-term retirement benefits.
4. Consult your statutory compliance, payroll, and accounting advisors for past-service accounting treatment under applicable accounting standards.

Frequently Asked Questions

1. What is the new gratuity rule under the Labour Codes?

Under the new Labour Codes, gratuity eligibility and calculation rules have been updated. The most significant change is expanded eligibility for fixed-term employees, who can now qualify after 1 year of continuous service instead of 5 years.

2. Are fixed-term employees now eligible for gratuity?

Yes. Fixed-term employees can now receive gratuity after completing 1 year of continuous service, compared to the previous 5-year requirement. This applies from 21 November 2025.

3. Does the new wage code affect gratuity calculation?

Yes. Since the wage code mandates that Basic Salary must be a minimum of 50% of CTC, a higher basic wage may increase future gratuity payouts. Employers should recalculate their total gratuity liability accordingly.

4. Will the new rules affect my take-home salary?

Possibly. If your basic salary increases to comply with the 50% rule, PF contributions will also increase, which may slightly reduce your monthly take-home pay. However, your long-term retirement savings will improve as a result.

5. Does the new Labour Code change the gratuity formula?

The formula itself remains the same. However, the definition of "wages" is now standardised. If allowances exceed 50% of CTC, the excess is added to wages, which increases the base amount used to calculate gratuity.

6. Are employers required to update payroll structures?

Yes. Employers must revise salary structures, employment contracts, and payroll systems to comply with the updated wage and gratuity rules effective November 2025.

7. When do these new gratuity rules become effective?

The new Labour Codes, including updated gratuity and wage provisions, came into effect on 21 November 2025. Employers are expected to be compliant from this date.

8. Will my CTC change because of the new rules?

No. Your CTC remains the same. Only the internal breakup of your salary may change to comply with the government's wage-structure regulations.

9. Why were these changes introduced?

The new Labour Codes were designed to provide stronger social security coverage for workers, standardise wages across industries, reduce the misuse of allowances as a way to suppress statutory contributions, and improve PF and gratuity benefits for all categories of employees.

10. Where can employees ask questions about the updated rules?

Employees should contact their HR or payroll team in the first instance. For external guidance, a statutory compliance consultant or payroll partner can provide specific advice on how the rules apply to your organisation and role.