Under the revised Labour Codes, wages used for gratuity calculations will include basic pay, dearness allowance (DA) and retaining allowance, which together must constitute at least 50% of an employee's total cost-to-company (CTC). According to reports from Mint, this represents a significant change from the previous framework where gratuity was typically computed on basic pay and dearness allowance only. For an employee whose basic pay was historically set at 30% of their CTC, shifting to a 50% wage floor results in a 66% increase in the gratuity payout. As noted by Rishi Agrawal, CEO and co-founder of Teamlease Regtech, since gratuity is calculated based on the last drawn wages, this requirement effectively establishes a higher legal floor for the payout, increasing the employer's total liability. The implementation mandates that at least 50% of an employee's CTC must be allocated as basic salary, with many companies currently keeping the basic component lower, requiring them to restructure pay packages to comply.
Fixed-term employees become eligible for gratuity after one year of continuous service, down from the earlier requirement of five years, though this rule only applies to employees who joined a company on or after the new labour codes were implemented. According to reports from Mint, the ministry has clarified that gratuity under the new Labour Codes will apply from 21 November 2025, the date of implementation. For regular employees, the general eligibility remains five years of service, while for employees covered under the Act, any service period exceeding six months in their final year is rounded up to a full year for payout calculation purposes. Additionally, gratuity pay will be calculated based on last drawn wages at the time of exit from the company, which may be due to retirement, resignation, or death.
The new rules are expected to significantly increase gratuity payouts for employees. As reported by Mint, for an employee with ₹1,00,000 monthly salary, the monthly base for gratuity increases from ₹30,000 to ₹50,000, resulting in a total payout difference of ₹57,693. Pooja Ramchandani, Partner at Shardul Amarchand Mangaldas & Company, provided an example where for a person with ₹12 lakh CTC, if basic pay is ₹50,000, special allowance is ₹20,000, HRA is ₹15,000 and conveyance is ₹15,000, the wage for gratuity payment under the erstwhile legal regime would be ₹50,000 and gratuity payment would be ₹1.44 lakh, while under the labour code, wage would be ₹70,000 and gratuity would be ₹2,01,923. However, this increase may be offset by reduced monthly take-home pay as provident fund contributions, which are tied to the wage base, increase alongside the gratuity base.
The new rules may significantly impact employee take-home salaries in the short term. According to reports from Mint, while this shift raises the long-term terminal benefits for the employee, it simultaneously increases the Defined Benefit Obligation (DBO) that companies must provision for on their balance sheets. Rishi Agrawal noted that in the short term, employees may see a lower take-home salary if CTC remains unchanged, while in the long term, retirement savings improve meaningfully. With basic pay forming a larger portion of salary, PF contributions, typically 12% of basic pay for many companies, are likely to rise, which could lead to a dip in in-hand salary, even though the overall compensation remains unchanged. The law directly impacts salary structuring, and if companies maintain the same overall CTC, higher statutory contributions will reduce in-hand salary. Annual increments and performance bonuses will need to be recalibrated within this framework, with the shift being structural rather than discretionary.
Gratuity is exempt from taxes for government employees, meaning they have to pay zero taxes on gratuity, while private sector employees may face taxation based on their gratuity amount. The government increased the tax exemption ceiling on gratuity from ₹10 lakh to ₹20 lakh in 2025. According to Mint, when an employee retires or resigns, the tax-exempt portion will be the least of: (a) the actual gratuity received, (b) ₹20 lakh, or (c) gratuity as per the formula (15/26 × last salary × years of service). If the gratuity amount is ₹15 lakh, it is fully tax-free, while if your gratuity is ₹25 lakh, ₹20 lakh is exempt from taxes. The remaining amount will be taxed according to the employee's income tax slab in the year of receipt. Every individual working in a factory, mine, oil field, port, railways, plantation, shops & establishments, or educational institution having 10 or more employees on any day in the preceding 12 months is entitled to gratuity.
The new codes extend beyond gratuity to other employee benefits. As reported by Mint, under the new Codes, statutory bonus is also computed on the redefined 'wages', subject to the usual eligibility period and monetary ceiling. CA Chandni Anandan, Tax Expert at ClearTax, noted that where wages expand due to the 50% CTC rule or broader inclusion of allowances, the bonus-eligible wage can go up, so for some employees, the absolute bonus amount may increase, even if the percentage remains the same. Additionally, wages for computing PF can be limited to the threshold of ₹15,000 as per the EPF Scheme or the actual basic, where basic is more than ₹15,000. The trade-off between liquidity today and social security tomorrow remains a key consideration for employees navigating these changes. Employees can expect a higher basic salary component and fewer flexible allowances, with some allowances and reimbursements being phased out.
