In simple words

On 21 November 2025 the Government brought the four Labour Codes into force. The Code on Social Security, 2020 replaced nine older laws, including the Payment of Gratuity Act, 1972 and the Employees' Provident Funds and Miscellaneous Provisions Act, 1952.

Three changes matter most for gratuity and PF:

  1. One definition of "wages" applies across all four Codes. If allowances and other excluded items are more than 50% of total pay, the excess is added back to wages. This can raise the base for gratuity and PF.
  2. Fixed-term employees get gratuity after one year of service, instead of five.
  3. PF now runs under the EPF Scheme, 2026, and the wage ceiling for compulsory PF rose from ₹15,000 to ₹25,000 a month from 17 September 2026.

Old rules made under the repealed Acts continue until the new rules replace them, to the extent they are consistent with the Codes.

The new definition of wages and the 50% rule

Under the Codes, wages include basic pay, dearness allowance (DA) and retaining allowance. They exclude items such as:

  • bonus, house rent allowance (HRA) and conveyance allowance
  • the employer's PF and pension contributions
  • the value of housing, utilities and medical facilities provided
  • overtime allowance and commission
  • gratuity and retrenchment compensation

The 50% rule. Add up the excluded items, other than gratuity and retrenchment compensation. If they are more than 50% of the total remuneration, the excess over 50% is added back to wages.

The Labour Ministry's FAQs say annual performance incentives, ESOPs, variable pay and reimbursements are not wages, and leave encashment is not an allowance for this test.

Example 1: applying the 50% rule. Monthly pay: basic and DA ₹40,000; HRA ₹30,000; conveyance ₹10,000; commission ₹20,000. Total remuneration ₹1,00,000. Excluded items are ₹60,000, which is ₹10,000 more than 50% (₹50,000). So wages = ₹40,000 + ₹10,000 = ₹50,000 for gratuity, PF and other statutory purposes.

Gratuity: old vs new

Point Payment of Gratuity Act, 1972 (old) Code on Social Security, 2020 (new)
Who must pay Establishments with 10 or more employees Same: establishments with 10 or more employees
Minimum service 5 years of continuous service (not needed on death or disablement) 5 years for permanent employees; 1 year for fixed-term employees; not needed on death, disablement or expiry of a fixed-term contract
Wage base Basic and DA last drawn Wages under the Codes, including any add-back under the 50% rule
Formula (monthly paid) 15 days' wages for each completed year (or part above six months), with a month taken as 26 days Same: 15/26 of monthly wages for each completed year or part above six months
Maximum ₹20 lakh ₹20 lakh (as currently notified)
Payment deadline Within 30 days of becoming payable Within 30 days of becoming payable (section 56(3)), with simple interest for any delay (section 56(4))
Seasonal workers 7 days' wages per season 7 days' wages per season

The Ministry's FAQs say the new gratuity provisions apply prospectively from 21 November 2025, so they cover gratuity that becomes payable on or after that date, based on last drawn wages. Better terms under an employment contract, award or agreement still apply.

Formula: Gratuity = wages × 15 ÷ 26 × years of service.

Example 2: permanent employee, effect of the new wage base. An employee with the pay in Example 1 resigns after 10 years and 4 months (counted as 10 years, because the part year is not more than six months).

  • Old basis (basic and DA ₹40,000): ₹40,000 × 15 ÷ 26 × 10 = ₹2,30,769
  • New basis (wages ₹50,000): ₹50,000 × 15 ÷ 26 × 10 = ₹2,88,462

The 50% rule raises the gratuity by ₹57,693.

Example 3: fixed-term employee. An engineer on a two-year fixed-term contract earns wages of ₹52,000 a month and leaves when the contract ends after 1 year and 8 months (counted as 2 years, because the part year is more than six months).

Gratuity = ₹52,000 × 15 ÷ 26 × 2 = ₹60,000.

Under the old Act this employee would have received nothing, because they had not completed five years. An employee who leaves before completing one year is not eligible.

Example 4: the ₹20 lakh cap. A manager with wages of ₹2,00,000 a month retires after 30 years. The formula gives ₹2,00,000 × 15 ÷ 26 × 30 = ₹34,61,538, but the payment is capped at ₹20,00,000.

PF: old vs new

Point Old (EPF Act 1952 and EPF Scheme 1952) New (Code on Social Security and EPF Scheme 2026)
Legal basis EPF and MP Act, 1952 Section 15 of the Code on Social Security, 2020; EPF Scheme, 2026 (G.S.R. 525(E), 29 June 2026), EPS 2026 and EDLI 2026
Coverage Establishments with 20 or more employees in scheduled industries All establishments with 20 or more employees, whatever the industry
Wage ceiling for compulsory PF ₹15,000 a month (since September 2014) ₹25,000 a month from 17 September 2026
Contribution base Basic, DA and retaining allowance Wages under the Codes, including any 50% add-back, up to the ceiling (higher by joint option)
Employee contribution 12% (10% for some establishments) 12% (10% for some establishments)
Employer contribution 12%, of which 8.33% to EPS (capped at ₹1,250) 12%, of which 8.33% to EPS, now on wages up to ₹25,000 (up to about ₹2,083)
Voluntary contributions Allowed (VPF) Allowed; the employer does not have to match

Example 5: PF after the ceiling rise. Wages under the Codes are ₹40,000 a month, and PF is paid on the statutory ceiling.

Contribution Ceiling ₹15,000 (old) Ceiling ₹25,000 (from 17 Sep 2026)
Employee 12% ₹1,800 ₹3,000
Employer 12% ₹1,800 ₹3,000
of which EPS 8.33% ₹1,250 ₹2,083
of which EPF ₹550 ₹917

Take-home pay falls by ₹1,200 a month, while retirement savings rise by ₹2,400 a month. EDLI and administration charges are paid by the employer on top.

Example 6: the 50% rule and a lower-paid employee. Basic and DA ₹12,000; HRA and other excluded allowances ₹13,000; total ₹25,000. Excluded items exceed 50% (₹12,500) by ₹500, so wages are ₹12,500. PF is 12% of ₹12,500 = ₹1,500 each from employee and employer, instead of ₹1,440 on basic alone. Because wages are within ₹25,000, PF membership is compulsory.

EPS membership has its own conditions, for example for members who joined after 1 September 2014 with pay above the ceiling then in force. Check the EPS 2026 rules or ask EPFO for a specific case.

What employers should do now

  • Re-test every salary structure against the 50% rule and update the gratuity and PF wage base in payroll.
  • Enrol employees earning ₹15,001 to ₹25,000 who were outside PF before 17 September 2026.
  • Recompute the gratuity liability (Ind AS 19 or AS 15 actuarial valuation) for the new wage base and for fixed-term staff with one year or more of service.
  • Track fixed-term contracts: gratuity is due when a contract of one year or more ends.
  • Check contractors: under the EPF Scheme 2026, the principal employer must pay PF for contract workers if the contractor does not.

Sources

Checked as of 26 October 2026. Central and State rules under the Codes are still being notified; check the latest rules for your State before you rely on this page.

Educational information only. This page is not tax, legal, accounting or investment advice and does not create any professional relationship. Laws, rates and thresholds change: read the official text or consult a qualified professional (CA, CS or lawyer) before you act.

Last reviewed 26 October 2026. Spotted an error? Tell us and we will correct it.