India’s shift to the new labour codes India 2026 marks a significant restructuring of the country’s employment-law system. Among the four Codes, the Code on Social Security, 2020 (SS Code) revisits the framework for gratuity, updating long-standing rules to better suit contemporary employment patterns. While the underlying purpose of gratuity remains, providing income support at the end of an employee’s service — the SS Code introduces several refinements that expand coverage and reshape how the benefit is calculated.
Scope of Coverage
Under the earlier Payment of Gratuity Act, 1972, any establishment with 10 or more workers was required to provide gratuity. The SS Code keeps this threshold but gives the Central Government broader authority to bring additional categories of establishments within its ambit. This flexibility allows the law to adapt as new business models emerge.
Importantly, once the gratuity provisions become applicable to an establishment, the obligation continues even if the workforce later drops below 10 employees, a principle retained from the prior law.
Eligibility: Impact on Fixed-Term Employment
One of the notable changes under the SS Code concerns fixed-term employees, who are now treated more equitably in terms of gratuity entitlement. While regular employees still generally must complete five years of continuous service to qualify (except in cases of death or disability), fixed-term employees are eligible for pro-rata gratuity based on the actual period they have worked, even if this period is less than five years.
This amendment acknowledges that the workforce increasingly includes short-term or project-based roles and ensures such workers are not excluded from social-security benefits under the labour law compliance framework introduced by the Codes.
Revised Definition of “Wages”
One of the most consequential updates is the adoption of a standardised definition of wages, which influences how gratuity is calculated. Under prior law, employers could reduce gratuity liability by structuring salaries so that Basic Pay and Dearness Allowance formed only a small portion of the total compensation. The SS Code closes this gap by stipulating that allowances cannot exceed 50 percent of total remuneration. If they do, the excess amount must be added back to wages.
This ensures that at least half of an employee’s compensation is counted for statutory calculations, resulting in higher gratuity payouts for many employees and increased financial responsibility for employers.
Gratuity Formula
Although the wage definition has changed, the calculation formula remains the same:
Gratuity = (15/26) × Last Drawn Wages × Completed Years of Service
The shift in what qualifies as “wages” is what ultimately increases gratuity amounts under the new regime introduced through the new labour codes India 2026.
Compliance Obligations and Penalties
The SS Code strengthens the enforcement mechanism surrounding gratuity. The updated framework allows for higher penalties, and in some situations, prosecution for employers who delay or fail to pay gratuity. Penalties also apply for issues such as obstructing inspectors, failing to maintain prescribed records, or withholding relevant documents.
These provisions demonstrate a stronger policy focus on accountability, timely payments, and transparent compliance practices.
What Employers Should Focus On
As the Labour Codes move closer to implementation, employers will need to reassess internal processes and compensation structures. Key considerations include adjusting salary compositions to comply with the revised wage definition, budgeting for potentially higher gratuity liabilities, preparing for pro-rata gratuity payments to fixed-term employees, and strengthening record-keeping and audit readiness to avoid compliance breaches.
While these changes may impose additional obligations, they also pave the way for clearer rules, fewer disputes, and a more consistent benefits framework.
The SS Code’s approach to gratuity reflects an effort to modernize India’s social-security landscape. Although the foundational concept of gratuity remains intact, the expanded coverage, inclusion of fixed-term workers, stricter compliance requirements, and unified wage criteria mark a shift toward fairness and long-term employee protection. Employers and HR teams should begin preparing now to ensure a seamless transition when the new labour codes India 2026 come into effect.
FAQs: Most Searched Questions About Gratuity Under the New Labour Codes (2026)
(These do not repeat your article content & are PAA-style search queries)
Yes, fixed-term employees may receive pro-rata gratuity based on actual service, even if under five years.
The SS Code expands coverage categories, and future notification may include gig workers in gratuity, depending on implementation rules.
Not under the new wage definition — allowances cannot exceed 50 percent of total remuneration.
Yes, gratuity must be paid within a prescribed period after separation, failing which penalties may apply.
Gratuity is calculated based on wages and service length, regardless of physical work location.
Employers should maintain service records, wage registers, employment contracts, and gratuity calculation statements.
Gratuity remains subject to existing income-tax exemptions and limits; the labour codes do not change tax treatment directly.
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