India’s New Labour Codes Transform Gratuity Rules, Granting Fixed-Term Workers Eligibility After One Year

The Government of India consolidated 29 labour laws into four comprehensive Labour Codes, which came into effect on 21 November 2025. These codes cover wages, social security, industrial relations, and occupational safety, fundamentally restructuring India’s labour regulation landscape.

Gratuity, a statutory lump-sum payment made by an employer to an employee upon leaving a job due to resignation, retirement, death, or disability, was previously governed by the Payment of Gratuity Act, 1972. Under that law, employees were required to complete a minimum of five years of continuous service before becoming eligible to claim gratuity.

Under the new framework, fixed-term employees now qualify for gratuity after completing just one year of continuous service. The benefit will be calculated on a pro rata basis, reflecting the actual duration of service. However, the government has clarified that the rules are not retrospective. Only employees who join a company on or after 21 November 2025 will be eligible to claim gratuity after one year of continuous service, as confirmed in the Labour Ministry’s FAQ documents.

Eligibility under the revised rules remains narrowly defined. The one-year provision applies specifically to fixed-term employees hired under a written contract for a set duration. Permanent employees must still complete five years of service to qualify for gratuity, except in cases of death or disability. Fixed-term contracts are widely used across sectors such as information technology, infrastructure, manufacturing, and retail, where workers are engaged for specific projects or defined periods. Employees in these categories who joined on or after 21 November 2025 now benefit from a significantly strengthened social security framework.

Beyond eligibility, the new Labour Codes introduce a critical change in wage definition that could substantially increase gratuity payouts. Under the unified wage structure, wages must constitute at least 50% of total remuneration. This restricts the excessive use of allowances to reduce statutory obligations such as provident fund, bonus, and gratuity. As a result, many employers will need to restructure payrolls, potentially increasing statutory costs due to a larger wage component.

Historically, companies in India often maintained low basic pay while inflating allowances to minimise statutory liabilities. The revised definition closes this loophole, potentially resulting in significantly higher gratuity payouts for employees whose basic pay was previously suppressed.

The standard gratuity calculation formula remains unchanged: gratuity amount equals last drawn wages multiplied by 15, multiplied by the number of completed years of service, divided by 26. The factor of 26 represents the average number of working days in a month, excluding Sundays. The gratuity amount continues to be capped at Rs 20 lakh for private sector employees.

The financial implications of these changes are already becoming evident. Companies preparing financial statements for the year ending 31 March 2026 must account for increased gratuity liabilities, with analysts projecting a 25 to 50% rise in obligations for most Indian firms. This underscores the scale of the reform and its direct impact on both employers and employees.

For crores of Indians transitioning between fixed-term roles in India’s expanding gig-adjacent formal economy, the reform marks a decisive shift towards broader social security coverage. It extends a key employment benefit that was previously limited to permanent workers, reinforcing protections in an evolving labour market.