Confusion over the calculation of gratuity under the new labour codes has finally been cleared with the issuance of fresh FAQs by the Ministry of Labour. The government announced that the new rules regarding gratuity would be implemented from November 21, 2025, when the codes came into force, and not retrospectively.
The Ministry of Labour has clearly announced that there would be no retrospective effect. There were concerns among employees and employers that the gratuity might be recalculated for past service periods or revised effective from April 1, 2026. The Ministry’s FAQs clearly announced that the new wage definition and gratuity calculation would be implemented from November 21, 2025.
Gratuity would be paid based on the last drawn wages at the time of exit, which could be retirement, resignation, or death. Establishments may make provisions in their books as per accounting norms.
Multiple implementation milestones created uncertainty. The labour codes came into force on November 21, 2025, while draft rules were released later on December 30 for consultation. The government also targeted a full operational rollout by April 1, 2026.
These steps, being staggered, led many to believe that major changes like the ones to gratuity would be effective from April 2026. The latest clarification, however, reaffirms that the effective date for implementation will be November 21, 2025.
The gratuity will be linked to the revised definition of wages under the Code on Social Security. Only certain salary components will be allowed, and the ones excluded will be retirement benefits and certain incentives. Additionally, if the allowances are more than 50% of the total salary, they will be added back to the salary.
One major change is that fixed-term employees will be entitled to gratuity after one year of service. Contractors will be liable for gratuity for contract workers completing five years.
The FAQs aim to bring compliance clarity for companies and payout certainty for employees as India moves towards full labour code implementation.