Gratuity – New labour rules allow fixed-term staff faster benefit access
Gratuity – For millions of workers employed on fixed-term contracts across India’s organised sector, a long-standing concern over delayed gratuity payments has finally been addressed. With the implementation of the new Labour Codes from 21 November 2025, eligible employees can now claim gratuity after completing just one year of continuous service, replacing the earlier five-year requirement that had been in place for decades.
Major shift under new labour framework
The Government of India has brought together 29 existing labour laws into four simplified Labour Codes covering wages, social security, industrial relations, and workplace safety. These reforms, now in effect, aim to modernise labour regulations and make them more relevant to current employment trends, especially the rise in contractual and project-based jobs.
Revised gratuity eligibility explained
Gratuity is a lump-sum payment made by employers when an employee leaves service due to resignation, retirement, death, or disability. Previously governed by the Payment of Gratuity Act, 1972, workers had to complete a minimum of five years of continuous service to qualify.
Under the new rules, fixed-term employees—those hired for a defined duration under formal contracts—can now claim gratuity after just one year of continuous employment. The payout will be calculated proportionately, based on the actual length of service rather than a full-term requirement.
Not applicable to all employees
While the change is significant, it is not universal. Permanent employees must still complete five years of service to become eligible for gratuity, except in cases involving death or disability where the requirement is waived.
Additionally, the revised one-year rule applies only to employees who join organisations on or after 21 November 2025. The government has clarified that the provision is not retrospective, meaning workers employed before this date will continue under the earlier rules unless future amendments are introduced.
Industries likely to benefit most
Fixed-term employment is widely used in sectors such as information technology, construction, manufacturing, and retail, where companies often hire workers for specific projects or limited durations. For employees in these sectors, the new provision provides greater financial security and ensures they are compensated even for shorter tenures.
Wage structure changes may boost payouts
Another important reform relates to how wages are defined. The new Labour Codes mandate that basic wages must account for at least 50 percent of total compensation. This reduces the scope for employers to structure salaries heavily through allowances, which earlier helped lower statutory payouts such as gratuity and provident fund contributions.
As companies adjust payroll structures to comply with the new definition, employees may see an increase in their gratuity amounts due to a higher base wage component.
Gratuity calculation remains unchanged
Despite the eligibility changes, the formula for calculating gratuity remains the same. The amount is determined using the last drawn salary, multiplied by 15 days’ wages for each completed year of service, and divided by 26 working days in a month.
For private sector employees, the maximum gratuity payable continues to be capped at Rs 20 lakh.
Financial impact on companies
The revised rules are expected to increase the financial obligations of employers. Companies preparing financial statements for the year ending 31 March 2026 will need to account for higher gratuity liabilities. Industry estimates suggest that obligations could rise by 25 to 50 percent, depending on workforce structure and salary composition.
A step toward broader social security
The reform is particularly important in the context of India’s evolving job market, where short-term contracts and project-based roles are becoming more common. By allowing earlier access to gratuity, the policy offers a stronger safety net for workers who may not remain in one organisation for extended periods.
For many employees navigating flexible employment arrangements, this change marks a meaningful move toward improved financial protection and more inclusive workplace benefits.