Gratuity New Rules 2026: Latest Changes, Eligibility, Calculation & Tax Exemption Explained

The Gratuity New Rule 2026 refers to the revised statutory framework for gratuity in India that comes into force under the newly consolidated labour codes, effective for employees exiting employment on or after November 21, 2025. Under these updated rules, fixed-term employees can claim gratuity after one year of continuous service, while the requirement for permanent employees remains five years of continuous service. Gratuity continues to be calculated based on last drawn wages (Basic + Dearness Allowance) using the statutory formula and enjoys tax exemption under Section 10(10) of the Income Tax Act up to prescribed limits. Official notifications and rules are available through the Ministry of Labour and Employment (Government of India) draft rules portal at https://labour.gov.in.

Key Highlights

• Eligibility Change: Fixed-term employees qualify for gratuity after one year; permanent employees after five years.
• Calculation Basis: Gratuity computed on last drawn basic pay + DA using the 15/26 formula.
• Tax Exemption: Up to ₹20 lakh tax-free for private sector employees under Section 10(10).
• Effective Date: New rules apply to employees leaving employment on/after November 21, 2025.
• Wage Definition: Wages must comprise at least 50 % of total CTC for benefits calculation.

Essential Gratuity Information – At a Glance

From Nov 21, 2025, for new hires/exits	Old Rule (Payment of Gratuity Act)	New Rule 2026 – Updated Labour Codes
Minimum Service – Permanent	5 years continuous service	5 years continuous service
Minimum Service – Fixed-Term	5 years (treated same)	1 year continuous service
Calculation Formula	(Last drawn salary × 15 × years)/26	Same formula; wage definition clarified
Tax Exemption Ceiling	₹20 lakh under Sec 10(10)	₹20 lakh (subject to tax regime rules)
Effective Implementation Start	Legacy Act provisions	From Nov 21 2025 for new hires/exits

Understanding the Gratuity New Rule 2026

The Gratuity New Rule 2026 embodies changes introduced through India’s consolidation of labour laws into a streamlined set of codes, especially the Wage Code. These updated rules reflect the government’s intent to modernize long-standing statutory benefits and improve inclusivity for contemporary employment models. The most significant enhancement under the new rule is the revised eligibility for fixed-term employees, effectively aligning them with retirees and permanent staff in terms of entitlement milestones.

The revised framework also strengthens the definition of wages, which directly affects how gratuity is calculated and ensures that a larger portion of the employee’s remuneration counts towards statutory benefits, such as gratuity, provident fund, and other welfare measures. Wages must now make up at least 50 % of the total Cost to Company (CTC) for gratuity computations.

Eligibility Criteria Under Gratuity New Rule 2026

Under the Gratuity New Rule 2026, eligibility for gratuity depends on the type of employment and length of service completed:

1. Permanent Employees
   Permanent employees remain eligible for gratuity only after completing five years of continuous service with the same employer, except in cases of death or disablement, where this requirement is waived.
2. Fixed-Term Employees
   Employees engaged on fixed-term contracts are now entitled to gratuity after one year of continuous service. Any subsequent service exceeding six months is rounded off to an additional year for gratuity calculation.
3. Death or Disability
   In the event of an employee’s death or disability, the gratuity payment becomes payable regardless of whether the minimum service requirement was achieved.
4. Organisations Covered
   Employers with ten or more employees working on any single day in the preceding year are statutorily bound to pay gratuity under the updated labour codes.

How Gratuity Is Calculated Under New Rules

The Gratuity New Rule 2026 retains the statutory formula used under the legacy Payment of Gratuity Act, harmonized with the updated wage definitions:

• Gratuity Formula (Act Covered):
  Gratuity = (Last Drawn Salary × 15 × Years of Service) ÷ 26
  Where “last drawn salary” includes Basic pay + Dearness Allowance, and the service years are rounded up if the employee has worked six months or more beyond a whole year.
• Example Calculation:
  If an employee’s last drawn salary (Basic + DA) is ₹50,000, and they have completed 10 years and 8 months (rounded to 11 years):
  Gratuity = (₹50,000 × 15 × 11) ÷ 26 = ₹3,17,307 (approx).

Under the new wage structure, since wages must constitute at least 50 % of CTC, a higher defined wage base can lead to a higher statutory gratuity amount for employees with greater non-basic allowances.

Gratuity Tax Exemption Explained

The Gratuity New Rule 2026 continues to maintain the tax exemption framework under Section 10(10) of the Income Tax Act. Key elements include:

• Private Sector Employees Covered by the Act:
  The gratuity received is exempt from income tax up to the least of the following:
  • Actual gratuity received
  • Calculated gratuity under the formula
  • ₹20,00,000 ceiling under Section 10(10) of the Income Tax Act.
• Government Employees:
  For central government employees, gratuity is fully tax-exempt with no upper cap.
• New Tax Regime Considerations:
  Under India’s default new tax regime, only up to ₹5,00,000 of gratuity may be exempt unless the taxpayer opts for the old regime, in which full benefits of the ₹20 lakh exemption apply.

Why the Gratuity New Rule 2026 Matters

The Gratuity New Rule 2026 holds substantial importance for both employees and employers. For employees, especially those on fixed-term or contract roles, the reduction of eligibility from five to one year for gratuity entitlement marks a decisive step toward broader financial inclusion and workforce security. This change directly addresses the evolving employment landscape where short-term and project-based engagements are increasingly common.

For employers, the updated rules necessitate proactive adjustments in payroll systems, benefit planning, and accounting practices, including recognizing gratuity liabilities earlier and calculating statutory benefits using the new wage definitions and service criteria. Financial reporting and expense recognition will accordingly reflect enhanced gratuity obligations for fixed-term and regular employees alike.

Conclusion

The Gratuity New Rule 2026 ushers in a more inclusive statutory framework for employee benefits in India, particularly by enabling fixed-term employees to access gratuity after just one year of service while preserving the five-year standard for permanent employees. The gratuity calculation continues under the familiar statutory formula, now aligned with broader wage definitions, and tax exemptions remain available under Section 10(10) of the Income Tax Act within defined ceilings. Workers and organisations must understand these updates thoroughly to ensure compliance, accurate payroll processing, and optimal benefit planning under the updated labour codes.

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