The new labour codes have brought a significant change to gratuity rules, enabling certain eligible employees to claim gratuity after just one year of continuous service, as opposed to the previous requirement of five years. Implemented in November 2025, these codes now offer gratuity on a pro rata basis to fixed-term and contract workers. While permanent employees still need to fulfill a five-year tenure for gratuity eligibility, exceptions exist in cases of death or disability, according to a report from NDTV Profit.
Fixed-term employees, engaged by companies for a specific duration under written contracts, will now have their gratuity calculated proportionally based on their service period. These new regulations are expected to expand access to post-employment benefits for numerous formal sector workers in India. The codes specify that gratuity must be computed based on wages, constituting at least 50% of an employee’s total cost-to-company (CTC).
The definition of wages by the labour ministry encompasses all forms of remuneration payable to an employed individual, including basic pay, dearness allowance, and any retaining allowance. Consequently, employees with lower previous basic pay can anticipate a significant increase in their gratuity payouts. Gratuity, a statutory lump-sum payment from employers to employees as a gesture of appreciation for long-term service, is typically granted after five years or upon retirement.
The Labour Ministry, in its FAQ documents, stated that gratuity would be applicable from November 21, 2025, the date of the Code’s enforcement. Establishments are advised to make provisions in accordance with accounting standards. Therefore, only employees joining a company on or after November 21, 2025, will be eligible to claim gratuity after completing one year of continuous service.
