Most of us think about salary, bonuses, or increments. Gratuity? It usually stays in the background until the day we resign or retire. But here’s the surprising part. Gratuity Rules 2026 quietly change how much money many employees in India can legally claim, and for some workers, the benefit now starts much earlier than before.
With the new labour codes taking effect from late 2025, gratuity is no longer just a long-term reward for permanent staff. It’s becoming a broader safety net, especially for contract and fixed-term employees. If you’re working today, these rules directly affect your future finances.
Who Is Eligible for Gratuity in 2026?
The biggest change under Gratuity Rules 2026 is eligibility for fixed-term and contract employees.
Earlier, most workers needed five years of continuous service. Now, fixed-term and contract employees qualify after just one year of service. That’s a game changer for project-based and short-duration roles.
For permanent employees, the five-year rule still applies. Gratuity remains applicable to organisations with 10 or more employees. In cases of death or permanent disability, gratuity is payable immediately, no matter how long the employee worked.
This shift reflects how India’s workforce is changing. Shorter contracts are common, and the law is finally catching up.
How Gratuity Is Calculated Now
The calculation formula hasn’t changed, but the definition of wages has.
Gratuity = (Last Drawn Wages × 15 × Completed Years of Service) / 26
Under the new rules, wages must be at least 50 percent of total remuneration. If your basic pay and dearness allowance together are below 50 percent of your CTC, they are still treated as 50 percent for gratuity calculation.
Also, if you complete more than six months in your final year, it counts as a full year. In real terms, this often leads to a higher payout than before.
Gratuity Limit and Tax Benefits
The maximum gratuity limit remains Rs. 20 lakhs, which is tax-free for employees covered under the Payment of Gratuity Act. Any amount above this is taxable as per income tax laws. Government employees continue to enjoy full exemption.
Employers must release gratuity within 30 days of it becoming due. Delays attract simple interest at 10 percent per year, which protects employees from unnecessary waiting.
Key Gratuity Rules 2026 at a Glance
| Aspect | 2026 Rule | What It Means for You |
|---|---|---|
| Eligibility | 1 year for contract, 5 years permanent | More workers covered |
| Wage Definition | Minimum 50% of remuneration | Higher calculation base |
| Maximum Limit | Rs. 20 lakhs tax-free | Secure retirement amount |
| Payment Timeline | Within 30 days | Faster access to funds |
| Delay Penalty | 10% annual interest | Employer accountability |
Why Gratuity Rules 2026 Matter
Think about it this way. Gratuity is often the largest lump sum an employee receives after leaving a job. With Gratuity Rules 2026, more people can now rely on this amount as part of their financial planning.
Always check your gratuity during full and final settlement. If something doesn’t add up, raise it early with HR.
Frequently Asked Questions
Is gratuity applicable to contract employees in 2026?
Yes. Under Gratuity Rules 2026, fixed-term and contract employees become eligible after completing one year of continuous service. This is a major shift from the earlier five-year requirement.
How is gratuity calculated under the new labour codes?
The formula remains the same, but wages must now be at least 50 percent of total remuneration. If basic pay is lower, it is deemed as 50 percent for calculation, often increasing the final payout.
Is gratuity taxable in 2026?
Gratuity up to Rs. 20 lakhs is tax-free for employees covered under the Act. Any amount above this is taxable. Government employees continue to receive full tax exemption.