The rule in plain words
Under the Code on Social Security, 2020 (in force since 21 November 2025), “wages” means basic pay, dearness allowance and retaining allowance. Most other allowances are excluded — but if the excluded parts are more than 50% of your total pay, the amount above 50% is added back to wages. In effect, wages for gratuity can never be less than half of your total pay.
Worked example
Your monthly pay is ₹70,000: ₹30,000 basic + DA and ₹40,000 of allowances (HRA, special allowance and so on). You have 10 years of service.
- Half of total pay: ₹70,000 ÷ 2 = ₹35,000.
- Basic + DA is only ₹30,000, so ₹5,000 is added back. Wages for gratuity: ₹35,000.
- Gratuity: 15/26 × ₹35,000 × 10 = ₹2,01,923, instead of ₹1,73,077 on basic + DA alone. That is ₹28,846 more.
And the tax?
Here is the one wrinkle. The income-tax exemption is still worked out on basic + DA (15/26 × ₹30,000 × 10 = ₹1,73,077). So ₹1,73,077 is tax-free and the remaining ₹28,846 is added to your income and taxed at your slab rate. The calculator follows this cautious reading; if CBDT clarifies that the Labour Code wage definition applies for tax too, the whole amount would be exempt.
More examples (10 years of service)
| Basic + DA | Allowances | Wages for gratuity | Gratuity | Possibly taxable |
|---|---|---|---|---|
| ₹30,000 | ₹30,000 | ₹30,000 | ₹1,73,077 | ₹0 |
| ₹30,000 | ₹40,000 | ₹35,000 | ₹2,01,923 | ₹28,846 |
| ₹25,000 | ₹50,000 | ₹37,500 | ₹2,16,346 | ₹72,115 |
| ₹40,000 | ₹60,000 | ₹50,000 | ₹2,88,462 | ₹57,692 |
| ₹50,000 | ₹50,000 | ₹50,000 | ₹2,88,462 | ₹0 |
When basic + DA is already half or more of your total pay, nothing changes.
Why the rule exists
For years, many salary structures kept basic pay at 30–40% of the total and paid the rest as allowances. That lowered gratuity and PF, which are based on basic pay. The Labour Codes use a single definition of wages with a 50% floor, so that long-service benefits reflect a fair share of what you are actually paid. For most employees this is simply a quiet improvement in their gratuity.
What this means for you
- Your gratuity can only go up under this rule, never down.
- Your take-home pay may change if your employer restructures salaries to raise basic pay, because PF contributions are also based on wages.
- Check your payslip. Add up everything that is not basic, DA or retaining allowance. If it is more than half your gross, the 50% rule applies to you.
The exact list of payments that count in the 50% test is in section 2(88) of the Code (for example HRA, conveyance, overtime and commission); gratuity and retrenchment compensation are not part of it. The calculator simply uses the monthly allowances you enter.
FAQ
What is the 50% wage rule for gratuity?
Under the Code on Social Security, if allowances excluded from wages are more than half of your total pay, the excess is added back to wages. So wages for gratuity are at least 50% of your pay.
How much gratuity on ₹30,000 basic and ₹40,000 allowances for 10 years?
Wages become ₹35,000, so gratuity is 15/26 × ₹35,000 × 10 = ₹2,01,923, compared with ₹1,73,077 on basic + DA alone.
Is the extra gratuity from the 50% rule tax-free?
Not necessarily. The tax exemption is calculated on basic + DA, so in this example ₹1,73,077 is exempt and ₹28,846 may be taxable at your slab rate.
Sources (checked 5 Nov 2026): Code on Social Security, 2020, ss. 2(88) and 53, in force 21 Nov 2025 (Ministry of Labour & Employment, labour.gov.in); Social Security (Central) Rules, G.S.R. 344(E) of 8 May 2026; Payment of Gratuity Act, 1972, s.4; Income-tax Act, 1961 s.10(10) and Income-tax Act, 2025 s.19 (incometaxindia.gov.in); CBDT notification S.O. 1213(E) dated 8 Mar 2019 (₹20 lakh). Cross-checked with law-firm commentary (Mondaq, Bar & Bench, Business Today).