New Labour Codes Revise Gratuity Rules for Employees in India
Changes to Gratuity Regulations
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New Delhi, April 4: Recent updates to the labour codes have significantly altered the gratuity regulations, enabling eligible employees to receive gratuity after just one year of continuous employment, a reduction from the previous five-year requirement.
Implemented in November 2025, the new labour codes allow fixed-term and contract workers to claim gratuity on a pro rata basis. Permanent employees, however, are still required to complete five years of service to qualify for gratuity, except in cases of death or disability, according to a report from a news media outlet.
Fixed-term employees are those hired for a specific duration under a written agreement, which may last for one or two years. The gratuity for these workers will now be calculated based on the length of their service.
This change is expected to enhance access to post-employment benefits for millions of formal sector workers across India. The new regulations stipulate that gratuity must be calculated based on wages, which should constitute at least 50% of an employee's total cost-to-company (CTC).
The labour ministry has defined wages as encompassing all forms of remuneration, including salaries, allowances, and other payments, such as basic pay and dearness allowance.
As a result, employees with lower previous basic pay are likely to see a significant increase in their gratuity payouts.
Gratuity, as mandated by law, is a one-time payment made by the employer to the employee as a gesture of gratitude for long-term service, typically after five years or upon retirement.
According to the Labour Ministry's FAQ documents, gratuity will take effect from November 21, 2025, which is the date the Code is enforced. Employers are advised to make provisions in accordance with accounting standards.
Consequently, only those employees who commence their employment on or after November 21, 2025, will be eligible to claim gratuity after completing one year of continuous service.