Fixed-term employees to get gratuity after 1 year of service under new labour laws

  According to the Union Labour Ministry, the restructuring is aimed at ensuring better wages, wider social security coverage and improved health-related protections for workers across sectors.

Gratuity Calculator

The government consolidated 29 existing labour laws, including the one concerning gratuity payment, into four simplified labour codes. (Image for representation)

India Today Business Desk

New Delhi,UPDATED: Nov 22, 2025 10:13 IST

Fixed-term employees across sectors will now be entitled to gratuity after just one year of employment at an organisation and not after mandatorily completing five years as the Union government on Friday unveiled a major overhaul of India’s labour framework. The government consolidated 29 existing labour laws into four simplified labour codes.

According to the Union Labour Ministry, the restructuring is aimed at ensuring better wages, wider social security coverage and improved health-related protections for workers across sectors.

A fixed-term employee is an individual hired under a contract that specifies a predetermined end date or terminates upon the completion of a specific task or project.

The reforms extend to informal workers, gig and platform workers, migrant labourers and women employees.

One of the most significant announcements in this package concerns gratuity entitlement—a change that could impact millions of employees.
5-YEAR-LIMIT A THING OF THE PAST

Under the Payment of Gratuity Act, fixed-term employees previously became eligible for gratuity only after completing five years of continuous service in an establishment.

With the new labour codes taking effect, this tenure requirement has been relaxed for Fixed Term Employees (FTEs).

Such employees will now qualify for gratuity after completing just one year of service.

The ministry clarified that the objective behind this change is to bring fixed-term workers at par with their permanent counterparts.

Under the updated rules, FTEs will be entitled to the same salary structure, leave facilities, medical benefits and social security measures as regular employees.

The government expects these changes to discourage excessive dependence on contract staffing and encourage more transparent, direct hiring by companies.
WHAT IS GRATUITY?

Gratuity is a financial benefit paid by an employer to an employee as a token of appreciation for long-term service. Traditionally, this lump-sum amount was handed over when an employee resigned, retired or otherwise separated from an organisation after completing the mandatory five-year service period.

With the revised framework, employees under fixed-term contracts will not need to wait for this extended duration.

Instead, they will receive gratuity after one year of service, making the benefit more accessible and providing a stronger financial cushion during job transitions.

The Payment of Gratuity Act covers a wide range of establishments, including factories, mines, oil fields, ports and railways.

While there had been speculation earlier that the government might reduce the eligibility period to three years, the latest decision marks a more substantial relaxation, effectively bringing the qualifying period down to a single year for a specific category of workers.
HOW YOU CAN CALCULATE YOUR GRATUITY

The gratuity amount is calculated using a standard formula:

Last Drawn Salary (15/26) Number of years of service

Here, the last drawn salary includes Basic Pay and Dearness Allowance.

For instance, if an employee served a company for five years and their final basic-plus-DA salary was Rs 50,000, the gratuity would be:

50,000 (15/26) 5 = Rs 1,44,230.

The revised policy is expected to provide greater security to employees while improving workforce stability for employers.

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