TITLE: WILL YOU GET MORE GRATUITY IN 2026? HERE’S WHAT HAS CHANGED:

-What is Gratuity?

Gratuity is a lump-sum amount paid by an employer to an employee as a token of appreciation for continuous service. It is governed under the Code on Social Security, 2020, which has replaced the earlier Payment of Gratuity Act, 1972.

The benefit provides financial security when an employee:

• Retires
• Resigns after completing the qualifying service
• Becomes permanently disabled
• Passes away (paid to legal heirs or nominee)

1. Code on Social Security, 2020 is Operational

India has consolidated multiple labour laws under the Code on Social Security, 2020. Gratuity is now regulated under this unified legislation, making compliance simpler and extending social security to a wider workforce.

2. Fixed-Term Employees Become Eligible After One Year

One of the biggest reforms is for fixed-term employees.

Earlier, gratuity generally required five years of continuous service. Under the new framework, a fixed-term employee who completes one year of continuous service is eligible for proportionate gratuity when the contract ends. Permanent employees must still complete the standard qualifying service.

3. New Wage Definition May Increase Gratuity

The Code introduces a broader definition of “wages.”

Since gratuity is calculated on wages, employees whose salary structures previously relied heavily on allowances may receive higher gratuity amounts after salary restructuring to comply with the Code. Employers are also restricted from reducing employee benefits merely to offset higher social security costs.

4. Digital Compliance and Simplified Administration

The Government has emphasized digital compliance under the labour codes, making record maintenance, inspections, and statutory processes more transparent and technology-driven for employers.

5. Tax-Free Gratuity Limit

The maximum tax-exempt gratuity for eligible employees continues to be:

₹20,00,000

There has been no official increase beyond this limit as of July 2026.

>Who is Eligible for Gratuity?

An employee becomes eligible if:

• They have completed five years of continuous service (for most permanent employees).
• The five-year condition is waived in cases of death or permanent disability.
• Fixed-term employees become eligible after one year as provided under the Code

• >How is Gratuity is calculated…?

For monthly-rated employees:

Gratuity = (Last Drawn Wages × 15 × Years of Service) ÷ 26

Where:

• Last Drawn Wages generally include wages as recognized under the Code.
• Service exceeding six months is generally rounded up to the next completed year.
• Example

Last Drawn Wages: ₹60,000

Service: 10 years and 8 months

Years considered = 11

Gratuity = (60,000 × 15 × 11) ÷ 26

Approximate Gratuity = ₹3,80,769

Can an Employer Refuse to Pay Gratuity?

Generally, no.

If an employee satisfies the legal eligibility conditions, gratuity cannot be denied except in specific circumstances permitted under law, such as certain proven acts involving moral turpitude or specified misconduct. Courts have continued to reinforce employers’ obligations regarding timely gratuity payments.

Common Myths About Gratuity

Myth 1: Gratuity is deducted from salary.

Fact: Gratuity is paid by the employer. It is not deducted from the employee’s monthly salary.

Myth 2: Every employee gets gratuity after one year.

Fact: The one-year eligibility applies only to eligible fixed-term employees. Most permanent employees still need the qualifying service period.

Myth 3: Contract employees never receive gratuity.

Fact: Eligible fixed-term employees can receive gratuity after completing one year under the new framework.

Important Tips for Employees

• Keep appointment letters and salary records safely.
• Ensure your nomination details are updated.
• Verify your salary structure if your employer has implemented the new wage definition.
• Request gratuity settlement promptly after separation from employment.

Employer Compliance Checklist

• Review salary structures under the new wage definition.
• Maintain accurate employment and wage records.
• Process gratuity payments within statutory timelines.
• Ensure fixed-term employees receive applicable gratuity benefits.
• Stay updated with labour code notifications and compliance requirements.