Gratuity framework 2025: Faster eligibility, bigger payouts as wage base expands under revised labour rules
The new gratuity rules introduced by the government significantly expand access to social security benefits for India’s growing fixed-term and contract workforce. One of the biggest reforms is the sharp reduction in the service requirement for gratuity eligibility. Fixed-term employees, who earlier needed five years of continuous service to qualify, will now become eligible after just one year.
- Nov 26, 2025,
- Updated Nov 26, 2025 8:40 AM IST
Gratuity is a payment from an employer to an employee for services rendered, typically given to those with five or more years of service. It is governed by the Payment of Gratuity Act, 1972. Employees may receive gratuity earlier if disabled due to an accident or disease. The amount depends on the last drawn salary and years of service. It is payable on retirement, resignation, or separation, offering financial security as employees move to their next phase.
Recent government amendments have reduced the minimum service period for gratuity eligibility for fixed-term and contract workers from five years to just one year of continuous employment. This makes the benefit more accessible and aligns contract worker entitlements with those of permanent staff.
Gratuity is calculated using a formula from Section 4(2) of the Act: last-drawn monthly wage × 15 / 26 × completed years of service. With revised labour codes, the definition of 'wage' for statutory benefits now includes basic salary, dearness allowance, and retaining allowance. If allowances and contributions exceed 50% of total remuneration, the excess is added to the wage base. Social security contributions like provident fund (PF), gratuity, maternity benefits, and bonus are now calculated from this broader wage, resulting in higher benefit payouts.
Gratuity is a part of the Cost to Company (CTC), reflecting the employer’s future financial obligation. Employment law experts note that gratuity must be included in the CTC as it is a statutory payment from the company’s resources. The new labour codes expand the wage definition:
The extension of gratuity to fixed-term employees in the export sector, along with contract workers, is a move toward equitable social security. Export sector fixed-term staff are now entitled not only to gratuity but also to provident fund and other statutory benefits. These regulatory updates aim to provide comparable social security for all categories of workers, regardless of contract type or sector.
New Gratuity rules
As per experts, with the newly notified Labour Codes (2025), the definition of wages used for calculating gratuity and other statutory benefits has been substantially broadened. Any portion of allowances exceeding 50% of an employee’s total remuneration can now be added back to the wage base for calculation purposes. This effectively raises the salary benchmark on which benefits like gratuity are computed, resulting in potentially higher payouts for employees and increased statutory liability for employers.
1. Gratuity eligibility for fixed-term employees cut to 1 year The government has reduced the minimum continuous service requirement for fixed-term workers from five years to just one year. This makes gratuity significantly more accessible for employees working on time-bound or project-based contracts.
2. Contract workers to receive gratuity at par with permanent staff Principal employers must now ensure that contract workers hired through agencies receive the same gratuity and social security coverage as regular employees. This move aims to eliminate disparity between contract and permanent staff performing similar work.
3. One-year gratuity eligibility extended to contract workers Just like fixed-term employees, contract workers will also qualify for gratuity after one year of uninterrupted service, instead of the earlier five-year threshold. This strengthens financial protection for workers in high-turnover sectors.
4. Export-sector fixed-term employees now covered Fixed-term employees in the export industry will now be eligible for gratuity, provident fund (PF), and other social security benefits. Extending these protections to export-sector workers brings greater uniformity in employee welfare rules.
Gratuity calculation
As per ClearTax, for employees covered under the Payment of Gratuity Act, gratuity is computed using the formula: Gratuity = (n × b × 15) / 26, where n represents the number of completed years of service and b is the last drawn basic salary plus dearness allowance.
For employees not covered under the Act, a slightly different formula applies: Gratuity = (15 × last drawn salary × tenure) / 30.
For example, if someone worked for 15 years with a last drawn salary of Rs 30,000, their gratuity would be Rs 2,59,615. Another example: for an employee earning Rs 30,000 with seven years of service (not covered under the Act), the gratuity works out to Rs 1,05,000. It’s important to note that the maximum tax-free gratuity limit is Rs 20 lakh, and any amount beyond that is paid as ex gratia. The calculator also accounts for rounding—if an employee has worked more than six months in the final year, it is rounded up to the next full year.
Gratuity is a payment from an employer to an employee for services rendered, typically given to those with five or more years of service. It is governed by the Payment of Gratuity Act, 1972. Employees may receive gratuity earlier if disabled due to an accident or disease. The amount depends on the last drawn salary and years of service. It is payable on retirement, resignation, or separation, offering financial security as employees move to their next phase.
Recent government amendments have reduced the minimum service period for gratuity eligibility for fixed-term and contract workers from five years to just one year of continuous employment. This makes the benefit more accessible and aligns contract worker entitlements with those of permanent staff.
Gratuity is calculated using a formula from Section 4(2) of the Act: last-drawn monthly wage × 15 / 26 × completed years of service. With revised labour codes, the definition of 'wage' for statutory benefits now includes basic salary, dearness allowance, and retaining allowance. If allowances and contributions exceed 50% of total remuneration, the excess is added to the wage base. Social security contributions like provident fund (PF), gratuity, maternity benefits, and bonus are now calculated from this broader wage, resulting in higher benefit payouts.
Gratuity is a part of the Cost to Company (CTC), reflecting the employer’s future financial obligation. Employment law experts note that gratuity must be included in the CTC as it is a statutory payment from the company’s resources. The new labour codes expand the wage definition:
The extension of gratuity to fixed-term employees in the export sector, along with contract workers, is a move toward equitable social security. Export sector fixed-term staff are now entitled not only to gratuity but also to provident fund and other statutory benefits. These regulatory updates aim to provide comparable social security for all categories of workers, regardless of contract type or sector.
New Gratuity rules
As per experts, with the newly notified Labour Codes (2025), the definition of wages used for calculating gratuity and other statutory benefits has been substantially broadened. Any portion of allowances exceeding 50% of an employee’s total remuneration can now be added back to the wage base for calculation purposes. This effectively raises the salary benchmark on which benefits like gratuity are computed, resulting in potentially higher payouts for employees and increased statutory liability for employers.
1. Gratuity eligibility for fixed-term employees cut to 1 year The government has reduced the minimum continuous service requirement for fixed-term workers from five years to just one year. This makes gratuity significantly more accessible for employees working on time-bound or project-based contracts.
2. Contract workers to receive gratuity at par with permanent staff Principal employers must now ensure that contract workers hired through agencies receive the same gratuity and social security coverage as regular employees. This move aims to eliminate disparity between contract and permanent staff performing similar work.
3. One-year gratuity eligibility extended to contract workers Just like fixed-term employees, contract workers will also qualify for gratuity after one year of uninterrupted service, instead of the earlier five-year threshold. This strengthens financial protection for workers in high-turnover sectors.
4. Export-sector fixed-term employees now covered Fixed-term employees in the export industry will now be eligible for gratuity, provident fund (PF), and other social security benefits. Extending these protections to export-sector workers brings greater uniformity in employee welfare rules.
Gratuity calculation
As per ClearTax, for employees covered under the Payment of Gratuity Act, gratuity is computed using the formula: Gratuity = (n × b × 15) / 26, where n represents the number of completed years of service and b is the last drawn basic salary plus dearness allowance.
For employees not covered under the Act, a slightly different formula applies: Gratuity = (15 × last drawn salary × tenure) / 30.
For example, if someone worked for 15 years with a last drawn salary of Rs 30,000, their gratuity would be Rs 2,59,615. Another example: for an employee earning Rs 30,000 with seven years of service (not covered under the Act), the gratuity works out to Rs 1,05,000. It’s important to note that the maximum tax-free gratuity limit is Rs 20 lakh, and any amount beyond that is paid as ex gratia. The calculator also accounts for rounding—if an employee has worked more than six months in the final year, it is rounded up to the next full year.