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New Labour Codes Slash Gratuity Wait to 1 Year for Contract Workers

India's new labour codes, effective November 2025, significantly reduce the service period required for gratuity eligibility for fixed-term and contract workers from five years to just one. These workers will now receive gratuity on a pro-rata basis, calculated according to their duration of service. However, the five-year rule remains unchanged for permanent employees, except in cases of death or disability. The reform is expected to expand post-employment benefits for millions in the formal sector and increase payouts for those with a lower basic pay, as gratuity must now be based on wages constituting at least 50% of the total CTC.

Key Points: New Gratuity Rules: 1-Year Eligibility for Contract Workers

  • Pro-rata gratuity for contract workers
  • Eligibility reduced from 5 years to 1
  • Permanent staff still need 5 years
  • Wages must be 50% of CTC
2 min read

New labour codes allow certain workers to claim gratuity after one year

India's new labour codes allow fixed-term & contract workers to claim pro-rata gratuity after just one year of service, effective Nov 2025.

"Gratuity will be applicable with effect from November 21, 2025 i.e. date of enforcement of the Code. - Labour Ministry FAQ"

New Delhi, April 4

The new labour codes have changed gratuity rules, allowing certain eligible employees to claim gratuity after one year of continuous service, cut down from the erstwhile rule of five-year period.

The new labour codes implemented in November 2025, makes gratuity available sooner for fixed-term and contract workers on a pro rata basis. Permanent employees still need to complete five years of service to claim gratuity, while there are exceptions in case of death or disability, a report from NDTV Profit said.

Fixed-term employees are hired by the companies for a set period under a written contract. Which may extend over a year or two. Gratuity for such employees will now be calculated on a pro rata basis, reflecting the duration of their service.

The new rules could broaden access to post-employment benefits for millions of formal sector workers in India. New labour codes mandate gratuity to be based on wages, which must make up at least 50 per cent of an employee's total cost-to-company (CTC).

The labour ministry defined wages as: "All remuneration whether by way of salaries, allowances or otherwise payable to a person employed, including basic pay, dearness allowance, retaining allowance, if any."

Employees with a lower past basic pay are hence expected to see gratuity payouts rise significantly.

Gratuity mandated by law, is a lump-sum payment an employee receives from the employer, as a token of appreciation for their long-term service, usually after five years or retirement.

"Gratuity will be applicable with effect from November 21, 2025 i.e. date of enforcement of the Code. Establishments may make provision as per accounting norms," the Labour Ministry said in its FAQ documents.

Thus, only employees who join a company on or after November 21, 2025, will be eligible to claim gratuity after completing one year of continuous service.

- IANS

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Reader Comments

R
Rohit P
Good step forward, but the implementation will be key. Will companies actually follow this for contract staff? And what about the millions in the informal sector who still get nothing? The policy is progressive, but its reach is limited.
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Aman W
Finally some recognition for fixed-term employees! I worked on a 2-year project and left with nothing because it was just under 5 years. This pro-rata system is much fairer. Hope it encourages more companies to offer proper contracts.
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Sarah B
As someone who has worked in HR here for a decade, this is a significant administrative change. Calculating pro-rata gratuity for short-term staff will add complexity to payroll. Companies need to update their systems well before Nov 2025 to avoid compliance issues.
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Vikram M
The clause about wages being 50% of CTC is crucial. Many companies keep basic pay very low to reduce PF and gratuity liability. This should ensure a more meaningful payout. A step in the right direction for employee welfare.
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Karthik V
Respectfully, while this helps new joiners post-2025, what about employees who have been in the system for years? Feels like a missed opportunity to make it retroactive or provide some benefit to existing contract workers who have already served multiple short terms.
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