New Labour Codes 2025: Who will now qualify for gratuity after one year of service instead of five
Under the updated framework, fixed-term workers will be treated on par with permanent employees in wages and benefits, with one key difference: the gratuity qualifying period has been reduced to one year, provided the worker completes at least 240 days of continuous service in that period.
- Nov 25, 2025,
- Updated Nov 25, 2025 3:23 PM IST
The four new Labour Codes took effect on Friday (November 21) are expected to reshape workplace rules for millions of employees and replace 29 legacy labour laws with a more streamlined framework. Among the biggest and most closely watched changes is a shift in gratuity eligibility—particularly for fixed-term employees, who will now qualify after just one year of continuous service. The long-standing five-year requirement, however, remains unchanged for permanent employees.
As per revised rules, fixed-term employees will now become eligible for gratuity after just one year of continuous service, with an expanded definition of wages that raises the calculation base and boosts payouts. Employers must release gratuity within 30 days, failing which a 10% annual interest penalty applies.
Under the updated framework, fixed-term workers will be treated on par with permanent employees in wages and benefits, with one key difference: the gratuity qualifying period has been reduced to one year, provided the worker completes at least 240 days of continuous service in that period. This ensures that short-tenure employees are not disadvantaged simply because their roles are contract-based.
The move is significant because gratuity calculations will now be based on the revised and expanded definition of wages. With “wages” required to form at least 50% of total compensation, the base used for gratuity computation is likely to increase, resulting in larger exit payouts for many workers.
Fixed-Term vs permanent roles
The distinction between the two categories is now more clearly defined. Fixed-term contracts come with a predetermined end date, usually linked to a project or time-bound assignment. Permanent roles, on the other hand, continue indefinitely. Despite structural differences, the new laws ensure that fixed-term staff receive equal treatment during employment, with gratuity entitlement pro-rated to their contract duration.
Importantly, labour experts stress that the one-year rule does not apply to all employees. Rohit Jain, managing partner at Singhania & Co, clarified: “The reports that every employee will now get gratuity after one year are incorrect. It is still five years for permanent employees. Only fixed-term employees benefit from the new one-year rule.”
Experts weigh in
According to Debjani Aich, Partner at CMS INDUSLAW, the change marks a major shift for companies long accustomed to engaging fixed-term workers without having to account for gratuity or severance. “With the introduction of pro-rata gratuity for these employees, employers now have an additional payout obligation,” she said.
While she expects some impact on hiring patterns, Aich believes the financial burden will still be lower than hiring full-time employees, preserving the viability of fixed-term work models.
On the requirement for mandatory appointment letters and statutory parity, she noted that clear documentation of terms will improve transparency and job security for fixed-term workers while compelling organisations to revisit internal policies to ensure compliance.
The new Codes also expand ESIC healthcare coverage to 740 districts, widen minimum wage protections across sectors and introduce mandatory health checkups for workers above 40. “These changes create a more equitable space for workers, especially those previously excluded from social security,” Aich said.
However, employers face substantial compliance challenges—particularly the revised wage definition and uniform overtime rules. With basic wages now mandated at a minimum of 50% of total pay, companies will need to overhaul salary structures and prepare for higher contributions toward PF, gratuity and severance.
How is gratuity calculated
Gratuity is calculated using a standard formula based on an employee’s last drawn basic salary plus dearness allowance and the number of years worked. The formula is: Gratuity = Last drawn salary × 15/26 × Years of service. The factor 15 represents 15 days of wages, while 26 denotes the average number of working days in a month. The total service period is rounded to the nearest full year. Under the Payment of Gratuity Act, 1972, the maximum payable amount is ₹20 lakh; if the calculation exceeds this, the employee receives only the capped limit. Gratuity payouts are also tax-free.
As India transitions to a modernised labour framework, the new gratuity rules stand out as one of the most meaningful changes for contract-based employees—offering them stronger financial security while nudging organisations toward more transparent, equitable employment practices.
The four new Labour Codes took effect on Friday (November 21) are expected to reshape workplace rules for millions of employees and replace 29 legacy labour laws with a more streamlined framework. Among the biggest and most closely watched changes is a shift in gratuity eligibility—particularly for fixed-term employees, who will now qualify after just one year of continuous service. The long-standing five-year requirement, however, remains unchanged for permanent employees.
As per revised rules, fixed-term employees will now become eligible for gratuity after just one year of continuous service, with an expanded definition of wages that raises the calculation base and boosts payouts. Employers must release gratuity within 30 days, failing which a 10% annual interest penalty applies.
Under the updated framework, fixed-term workers will be treated on par with permanent employees in wages and benefits, with one key difference: the gratuity qualifying period has been reduced to one year, provided the worker completes at least 240 days of continuous service in that period. This ensures that short-tenure employees are not disadvantaged simply because their roles are contract-based.
The move is significant because gratuity calculations will now be based on the revised and expanded definition of wages. With “wages” required to form at least 50% of total compensation, the base used for gratuity computation is likely to increase, resulting in larger exit payouts for many workers.
Fixed-Term vs permanent roles
The distinction between the two categories is now more clearly defined. Fixed-term contracts come with a predetermined end date, usually linked to a project or time-bound assignment. Permanent roles, on the other hand, continue indefinitely. Despite structural differences, the new laws ensure that fixed-term staff receive equal treatment during employment, with gratuity entitlement pro-rated to their contract duration.
Importantly, labour experts stress that the one-year rule does not apply to all employees. Rohit Jain, managing partner at Singhania & Co, clarified: “The reports that every employee will now get gratuity after one year are incorrect. It is still five years for permanent employees. Only fixed-term employees benefit from the new one-year rule.”
Experts weigh in
According to Debjani Aich, Partner at CMS INDUSLAW, the change marks a major shift for companies long accustomed to engaging fixed-term workers without having to account for gratuity or severance. “With the introduction of pro-rata gratuity for these employees, employers now have an additional payout obligation,” she said.
While she expects some impact on hiring patterns, Aich believes the financial burden will still be lower than hiring full-time employees, preserving the viability of fixed-term work models.
On the requirement for mandatory appointment letters and statutory parity, she noted that clear documentation of terms will improve transparency and job security for fixed-term workers while compelling organisations to revisit internal policies to ensure compliance.
The new Codes also expand ESIC healthcare coverage to 740 districts, widen minimum wage protections across sectors and introduce mandatory health checkups for workers above 40. “These changes create a more equitable space for workers, especially those previously excluded from social security,” Aich said.
However, employers face substantial compliance challenges—particularly the revised wage definition and uniform overtime rules. With basic wages now mandated at a minimum of 50% of total pay, companies will need to overhaul salary structures and prepare for higher contributions toward PF, gratuity and severance.
How is gratuity calculated
Gratuity is calculated using a standard formula based on an employee’s last drawn basic salary plus dearness allowance and the number of years worked. The formula is: Gratuity = Last drawn salary × 15/26 × Years of service. The factor 15 represents 15 days of wages, while 26 denotes the average number of working days in a month. The total service period is rounded to the nearest full year. Under the Payment of Gratuity Act, 1972, the maximum payable amount is ₹20 lakh; if the calculation exceeds this, the employee receives only the capped limit. Gratuity payouts are also tax-free.
As India transitions to a modernised labour framework, the new gratuity rules stand out as one of the most meaningful changes for contract-based employees—offering them stronger financial security while nudging organisations toward more transparent, equitable employment practices.