By IndiaHub 
Secondly wages will now include basic pay, dearness allowance, and retaining allowance with 50% of the total remuneration (or whatever percentage is announced) being added back to calculate wages.
When asked about the impact of the new 50% wage rule, Vinay Joy, Partner at Khaitan & Co, says: “In practical terms, this will prompt many employers to rebalance compensation structures toward a higher basic component, thereby increasing long-term statutory contributions.”
With the increase in basic pay, all deductions like gratuity, PF, and others that depend on basic components will also rise.
Read the full story to find out how much gratuity will increase under the new labour code on basics of Rs 25,000, Rs 30,000, Rs 50,000 and Rs 1 lakh, respectively..
Difference in gratuity payment rules
Kriti Kaushik, Partner, Shardul Amarchand Mangaldas & Co. says that eligibility for payment of gratuity for regular / permanent employees continues to be 5 years of continuous service.
The exception to the 5 years minimum service rule now includes expiry of a fixed term employment in addition to termination of employment on account of death and disability.
Kaushik says: “This essentially means that FTEs become eligible for payment of gratuity if their employment comes to an end even prior to the completion of 5 years. The distinction between FTEs and non FTEs, therefore, is in terms of the eligibility of minimum service of payment of gratuity. The basis and manner for calculation of the benefit remains the same for both categories.”
Calculation of gratuity under new labour code
Assuming an employee has a total monthly remuneration of Rs 70,000 over 10 years of service, with a basic salary of Rs 30,000 and excluded components of Rs 40,000, roughly speaking, the gratuity calculation will be as follows
| Existing Regime (Payment of Gratuity Act) | New Regime (Labour Code) |
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Source: Shardul Amarchand Mangaldas & Co.
According to Kaushik, the 50% rule under the new “wages” definition requires that any excluded allowances in excess of 50% of the total remuneration is ploughed back to the “wages” for calculation of statutory benefits.
Accordingly, while for a regular / permanent employee, gratuity will be payable only on completion of 5 years of continuous service; for fixed-term employees, gratuity will be payable on a pro-rata basis even if the contract expires before 5 years.
Kaushik says: “Given that the basis for calculation of gratuity in both cases is the “wages” last drawn by the employee, the calculation of gratuity even for FTEs will need to take into account the “wages” determined on the basis the 50% rule and the period of employment completed by the FTE.”
Divya Baweja, Partner, Deloitte India, says that the term “wages” under the labour codes is defined very broadly. It includes almost all types of remuneration (cash, allowances, or other payments), except for certain specific exclusions limited to 50% of total remuneration and gratuity and retrenchment comp which are excluded in full. Hence, only increasing the basic salary to 50% will not be compliance enough under the codes.
Baweja says: “So, the employees will be eligible to receive gratuity at revised wages, where ‘wage’ needs to be calculated as per the Codes.”
Table showing the impact of gratuity calculation for the Rs 25,000, Rs 32, 917, Rs 50,000, Rs 65,833, Rs 1 lakh and Rs 1,31,667 basic salary.
Understanding the impact for an employee with 7 years of service:
| Monthly wages for gratuity purpose(Monthly Basic/Wage) | Total Gratuity Amount |
| 25,000 | 100,962 |
| 32,917 | 132,933 |
| 50,000 | 201,923 |
| 65,833 | 265,866 |
| 1,00,000 | 403,846 |
| 131,667 | 531,731 |
Source: Deloitte
Baweja says: “Under the labour codes, gratuity cannot be computed solely on the basic salary, as the term “wages” now covers total remuneration less certain specified exclusions.”
The table below explains how gratuity will be calculated for CTC of Rs 6 lakh, Rs 12 lakh and Rs 24 lakh.
| Pay Components | Reference | Existing Laws (INR) | Social Security Code (INR) |
| Cost To Company Excluding Variable pay | CTC | 6,00,000 | 6,00,000 |
| Basic Pay(50% of CTC) | A | 300,000 | 3,00,000 |
| House Rent Allowance(50% of Basic) | B | 1,50,000 | 1,50,000 |
| Employer PF Contributions (not limited to statutory wage ceiling) | C | 36,000 | 36,000 |
| Gratuity(4.81 of Basic/Wages) | D | 14,430 | 19,000 |
| Special Allowance(Balancing Figure) | E | 99,570 | 95,000 |
| Total wages to be considered for Gratuity | Existing Laws – A | 3,00,000 | 3,95,000 |
| Social Security Code – (A+E) | |||
| Total of Exclusions (B+C+D) | 2,05,000 |
CTC of Rs 12 lakh and Rs 24 lakh
| Pay Components | Reference | Existing Laws (INR) | Social Security Code (INR) | Existing Laws (INR) | Social Security Code (INR) |
| Cost To Company Excluding Variable pay | CTC | 12,00,000 | 12,00,000 | 24,00,000 | 24,00,000 |
| Basic Pay(50% of CTC) | A | 6,00,000 | 6,00,000 | 12,00,000 | 12,00,000 |
| House Rent Allowance(50% of Basic) | B | 3,00,000 | 3,00,000 | 6,00,000 | 6,00,000 |
| Employer PF Contributions (not limited to statutory wage ceiling) | C | 72,000 | 72,000 | 1,44,000 | 1,44,000 |
| Gratuity(4.81 of Basic/Wages) | D | 28,860 | 37,999 | 57,720 | 75,998 |
| Special Allowance(Balancing Figure) | E | 1,99,140 | 1,90,001 | 3,98,280 | 3,80,002 |
| Total wages to be considered for Gratuity | Existing Laws – A | 6,00,000 | 7,90,001 | 12,00,000 | 15,80,002 |
| Social Security Code – (A+E) | |||||
| Total of Exclusions (B+C+D) | 4,09,999 | 8,19,998 |
Source: Deloitte
Asish Philip, Executive Partner at Lakshmikumaran and Sridharan attorneys, says that most companies are looking to restructure the wage structure basis the new labour code, so the tax benefit and saving opportunity will have to be seen.
According to Philip, ideally, if the companies do not restructure the wages, the value of wage on which the benefits such as NPS, PF and gratuity will be calculated will be a higher value which will lead to higher tax saving for the employees.
Philip says: “However, we will have to see. Most companies are reviewing and restructuring their wage structures in line with the new labour codes. The potential tax benefits and savings will depend on how this restructuring is implemented.”
Philip reiterated that if companies do not restructure wages, the calculation base for benefits such as NPS, PF, and gratuity will be on a higher wage value. This could lead to greater contributions toward these components, which in turn may result in higher tax-saving opportunities for employees.
Philip says: “However, the actual impact will vary and needs to be assessed once the final wage structure is confirmed.”
Will you get higher gratuity on the basis of higher basic from November 21, 2025 onwards or for proportionate periods?
There can be two aspects here:
- Employees who are leaving the company after the specified years of service after November 21, 2025
- Employees who joined before November 21, 2025 and are continuing their service
In both the cases, the question which comes to mind is due to the 50% wage rule, if the basic component is increased then gratuity increases (as seen from the tables) but this rule is applicable from November 21, 2025 onwards. However the new gratuity rules have given rise to confusion. All employees, who are eligible to get gratuity, whether they will receive a higher gratuity as per new higher basic salary for the entire period or whether the higher gratuity will be limited for the period of service after 21 November 2025.
According to Kaushik from Shardul Amarchand Mangaldas, given that the labour codes have been enforced with prospective effect, it remains to be seen whether the benefit calculations under the Codes will be bifurcated into the benefits accrued for the period prior to November 21, 2025 and after.
Kaushik says that presently it is not clear whether payment of gratuity to an individual who retires post November 21, 2025 will be calculated partly basis the provisions under the Payment of Gratuity Act (which require only basic plus DA to be taken into account) and partly basis the new wages definition provided under the Code.
Kaushik says: “That said, we understand that clarifications on the manner of calculation of benefits where the period of service includes both old and the new regime will be provided in the coming days.”
Who are Fixed Term Employees (FTE) and who are permanent employees?
All employees are technically contract employees, but, if your employment contract specifies an end date like 1 year, or 2 years, then you fall under the FTE category. In common parlance, these employees are called contractual employees, while those with contracts that do not have an end date, are known as permanent employees.
Arjun Paleri, Partner, BTG Advaya, says that fixed-term employees are also on-roll employees, unless they are engaged on a consultancy contract as an independent consultant.
According to Paleri, the key distinction between a fixed-term employee and a regular on-roll employee lies in the duration of employment.
Paleri says that a fixed-term employee is engaged for a definite period, and the employment concludes on the specific end date determined by the employer.
Paleri says: “In other words, fixed-term employees work under time-bound contracts, whereas regular on-roll (full-time) employees do not have a predetermined end date to their employment. This is why regular employment is often referred to as indefinite-term employment or permanent employment.”