Gratuity After Just One Year? Here Is What The New Labour Codes Mean For Fixed-Term Workers

India's new Labour Codes, effective 21 November 2025, allow fixed-term employees to claim pro rata gratuity after just one year of service instead of the earlier five-year requirement.

04 Apr 2026, 11:04 · www.ndtv.com

For millions of fixed-term workers in India's formal sector, a long-standing grievance has finally been addressed. Under the new Labour Codes that came into force on 21 November 2025, eligible employees no longer have to wait five years to claim gratuity. In a significant departure from decades-old rules, fixed-term workers can now receive the benefit after completing just one year of continuous service.

The Government of India consolidated 29 labour laws into four comprehensive Labour Codes, which came into effect from 21 November 2025, covering wages, social security, industrial relations, and occupational safety.

What has actually changed?

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. That law required a minimum of five years of continuous service before a worker could claim anything.

Under the new framework, fixed-term employees now qualify for gratuity after just one year of continuous service. Gratuity for such employees will be calculated on a pro rata basis, reflecting the actual duration of their service.

Crucially, the government has also clarified that the new rules are not retrospective. Only employees who join a company on or after 21 November 2025 will be eligible to claim gratuity after completing one year of continuous service, as the Labour Ministry confirmed in its FAQ documents.

Who qualifies and who does not?

This is where many workers must read carefully. The one-year rule is not a blanket benefit for everyone. Permanent employees still need to complete five years of service to claim gratuity, while exceptions exist in cases of death or disability. The new one-year rule applies specifically to fixed-term employees hired for a set period under a written contract.

Fixed-term contracts are common across sectors such as information technology, infrastructure, manufacturing, and retail, where workers are hired for specific projects or a defined duration. Those employed on such contracts, and who joined on or after 21 November 2025, now have a far stronger safety net than before.

The wage definition change that could significantly raise your payout

Beyond eligibility, the new codes introduce a change that could meaningfully increase the actual amount of gratuity received.

Under the new unified wage definition, wages must form at least 50% of total remuneration, meaning allowances cannot be used excessively to reduce provident fund, bonus, gratuity, and other statutory payouts. As a result, payroll restructuring is inevitable for many employers, as statutory costs may rise due to a larger wage component.

For years, many companies in India kept basic pay artificially low while padding salary structures with allowances, precisely to reduce their statutory obligations. The new definition closes that loophole. Employees with historically low basic pay could see significantly larger gratuity payouts as a result.

The standard gratuity calculation formula remains: 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 accounts for the average number of working days in a month, excluding Sundays. The gratuity amount is capped at Rs 20 lakh for private sector employees.

Why this matters

Companies preparing financial statements for the year ending 31 March 2026 must now account for the increased gratuity liability, with analysts projecting a 25 to 50% rise in gratuity obligations for most Indian companies. That is a measure of just how substantial the change is for employers, and by extension, for workers who stand to benefit.

For crores of Indians who move between fixed-term roles in India's growing gig-adjacent formal economy, the reform represents a meaningful step towards the kind of social security that was previously the preserve of those fortunate enough to hold permanent jobs.

(With inputs from agencies)

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