Indian salaried workers now prioritize retirement benefits which make gratuity their main focus. The ongoing debates about gratuity limit increase and new labour regulations started in 2026 because of the significant changes which affected central government workers and contract personnel. The updates implement system improvements which provide workers with enhanced financial security during their employment and throughout their entire period of service.
What Is Gratuity?
Gratuity is a lump-sum amount paid by an employer to an employee as a token of appreciation for continuous service. The Payment of Gratuity Act 1972 governs the law which requires payment at retirement or resignation or death.
Gratuity Limit Update 2026
The gratuity ceiling has already seen a major upward revision for select employees, and its impact continues in 2026.
| Employee Category | Gratuity Limit |
|---|---|
| Central Govt Employees | ₹25 Lakh |
| PSU & Govt Banks | ₹20 Lakh |
| Private Sector (Statutory) | ₹20 Lakh |
The 25 lakh limit applies to eligible central government employees who work under CCS rules. Private and PSU employees must adhere to the statutory cap, which remains fixed unless the company provides greater benefits.
Labour Code Impact on Gratuity
New labour codes have quietly changed how gratuity works for many workers.
- Contract employees can qualify after 1 year of service
- Permanent employees generally need 5 years of service
- Gratuity calculation now depends on a revised wage definition
These changes are especially important for younger employees and those in fixed-term roles.
How Gratuity Is Calculated
Gratuity calculation follows a simple formula:
- Formula:
(Last drawn salary × 15 × years of service) ÷ 26
The base salary for calculation purposes includes both basic pay and dearness allowance because this wage structure enables workers to obtain more substantial benefits.
Why Gratuity Matters More in 2026
Gratuity has become more relevant due to evolving job patterns and rising living costs.
- Higher retirement corpus for long-serving staff
- Better protection for contract workers
- Increased awareness of structured salary benefits
Gratuity now serves as a secondary retirement safety net for most employees because they receive both EPF and pension.
Gratuity Limit Increase 2026: FAQs
Q1. Has the gratuity limit increased to ₹25 lakh for everyone in 2026?
No. The ₹25 lakh limit applies only to eligible central government employees. Private and PSU employees still fall under the ₹20 lakh cap.
Q2. Is gratuity taxable in 2026?
Gratuity is tax-free up to the applicable limit. The tax obligation arises for any amount that exceeds the specified limit according to income tax regulations.
Q3. Can private companies pay more than ₹20 lakh gratuity?
Yes. Employers can offer higher gratuity through company policies, but tax exemption remains limited.
Q4. Is gratuity available after 1 year of service?
Yes, but mainly for fixed-term or contract employees under new labour codes.
Final Words
The Gratuity Limit Increase 2026 is not just about higher numbers but smarter rules. Central government workers receive direct advantages from the enhanced limit while private sector employees enjoy better access to wage-based eligibility requirements. The updates which you learn about today will have a significant impact on your retirement plans.