India’s long-delayed labour reforms took a decisive step forward in November 2025, when the government announced the implementation of the four labour codes, marking a shift away from colonial-era employment laws towards a consolidated, modern framework.
Among the most consequential changes for employers and employees is a revision to gratuity eligibility under the Code on Wages, which alters how benefits are calculated, who qualifies, and when payments become due. The changes are expected to directly affect salary structures, take-home pay and compliance obligations across sectors.
What has changed in the gratuity framework
Under the updated wage code, fixed-term employees become eligible for gratuity after completing just one year of continuous service. This marks a significant departure from the earlier framework, under which gratuity was primarily a long-tenure benefit payable after five years of service.
For permanent employees, the five-year eligibility threshold remains unchanged, except in cases of death or disability, where gratuity continues to be payable regardless of tenure.
The change reflects a broader policy intent to recognise the growing share of India’s workforce employed on fixed-term contracts, particularly in manufacturing, services, logistics and project-based roles.
Who is covered — and who is not
The revised gratuity provisions draw a clear distinction between categories of workers.
Fixed-term employees hired under a defined contract are now eligible for gratuity after one year of uninterrupted service. If the contract ends after completing this period, gratuity becomes payable along with the final settlement.
Permanent or regular employees remain governed by the five-year rule, with no dilution of existing protections.
However, contract workers engaged through contractors do not fall under this expanded eligibility. Their gratuity entitlements continue to be governed by existing arrangements, with responsibility resting on the contractor rather than the principal employer.
Crucially, fixed-term employees who do not complete a full year of continuous service — even due to unforeseen circumstances — will not qualify for gratuity.
How gratuity will be calculated
Despite the change in eligibility, the method for calculating gratuity remains unchanged.
Gratuity continues to be calculated using the formula:
(Last drawn salary × 15 / 26) × number of completed years of service
For statutory purposes, “last drawn salary” includes basic pay and dearness allowance, aligned with the wage definition under the labour codes. The factor 15/26 represents 15 days’ wages, assuming 26 working days in a month.
For example, a fixed-term employee completing three years of service with a last drawn basic and dearness allowance of ₹40,000 per month would be eligible for gratuity of approximately ₹69,231, subject to statutory limits.
The tax-free gratuity ceiling remains unchanged at ₹20 lakh.
Payment timelines and penalties
The new rules also reinforce timelines for payment. Employers are required to release gratuity within 30 days of an employee’s exit. Failure to do so can attract interest or penalties, with delays potentially leading to a 10% charge, depending on the circumstances.
For employers, this sharpens the need for tighter payroll processes, accurate wage structuring and timely full-and-final settlements.
The revised gratuity framework signals a shift in how employee benefits are conceived. For fixed-term workers, gratuity is no longer a distant, loyalty-based reward but a tenure-linked entitlement.
For employers, the change has cost and compliance implications. With wages now required to form at least 50% of total cost-to-company under the labour codes, gratuity liabilities are expected to rise, particularly in organisations with large fixed-term workforces.
HR and finance teams will need to revisit compensation design, provisioning and exit processes to remain compliant.
As the labour codes move from announcement to enforcement, employers are expected to face closer scrutiny on wage structures and statutory benefits. For employees, the reforms offer greater clarity and protection, particularly in non-permanent roles.
While the core gratuity formula remains intact, the expansion of eligibility reflects a broader recalibration of India’s employment framework — one that recognises changing work patterns while seeking to balance flexibility with social security.
Source – https://www.peoplematters.in/news/economy-policy/indias-new-gratuity-rules-2025-what-employers-and-employees-should-know-47753