New gratuity rules:
Are permanent employees also eligible for gratuity after 1 year of service under new labour code?
Nov 28, 2025
Synopsis
New labor codes have sparked interest in gratuity rules, with fixed-term and contract workers now eligible after one year of service. This change, however, does not extend to permanent employees, who still require five years of continuous service to qualify for gratuity benefits.
The rollout of 4 new labour codes has renewed curiosity among employees about gratuity rules, with many of them likely to benefit hugely from the labour reforms. The revised framework does offer a big advantage for fixed-term and contract workers by allowing them to qualify for gratuity after completing just one year of service compared to 5 years earlier. However, this has also led to confusion among some people who want to know if the same gratuity benefit has been extended to permanent employees. Here is what you should know.
Who is eligible for gratuity after 1 year?
Under the Code on Social Security, 2020:
Fixed-term employees will get gratuity after completing just 1 year of continuous service. This is a significant reduction from the standard 5-year minimum service requirement under the earlier law.
Not just FTEs, the government has also reduced continuous service years from 5 to 1 for contract workers to be eligible for gratuity.
Are permanent employees also eligible for gratuity after 1 year of service under the new Labour Codes?
The one-year gratuity eligibility applies only to Fixed-Term Employees (FTEs) and contract workers, not permanent employees. Permanent employees still require 5 years of continuous service to qualify, as no change for them is mentioned in the new Codes.
“The one-year gratuity eligibility rule is a new entitlement specifically created for fixed-term employees and does not apply to permanent employees. The standard eligibility period for permanent employees remains five years of continuous service. The only exception for the five-year rule for permanent employees would be in cases of employee death or disablement,” said Preetha Soman, partner, JSA Advocates and Solicitors.
What is gratuity?
Gratuity is a statutory benefit governed by the Payment of Gratuity Act 1972. It is a financial incentive given by an organisation to its employees in appreciation of their long-term contributions to the company. It serves as a monetary token of gratitude for an employee's years of commitment and devotion. The amount is disbursed when an employee retires, resigns, or separates from the organisation, offering a financial cushion for the next phase of life.
What does the labour code say about gratuity?
According to a Press information Bureau (PIB) release dated November 23, 2025, “For the purpose of calculation of benefits and social security contributions, the redefined wage includes basic pay, dearness allowance and retaining allowance. In case allowances and contributions exceed over 50% (as may be notified by the Central Government) of the total payment, the excess amount shall be added to the wage. Social security contributions and benefits (like PF, gratuity, maternity benefits and bonus) will be based on a larger and fairer portion of pay, resulting in higher future benefits.”
How is gratuity calculated?
Gratuity payouts are determined based on the Payment of Gratuity Act, 1972. As per Section 4(2) of the Act, gratuity payable is equal to the last-drawn monthly wage×15/26×completed years of service.
Is gratuity part of CTC?
Mayank Parashar, Associate at Clasis Law, says gratuity forms part of the cost to company (CTC) because it represents a future financial commitment that the employer must fulfil. Since this payment ultimately comes from the company’s resources, it is factored into the CTC.
[The Economic Times]
