The government has notified new rules for gratuity under the Payment of Gratuity Act, 1972, bringing major relief to India’s rapidly growing fixed-term workforce. Under the updated guidelines, employees on fixed-term contracts will now become eligible for gratuity after just one year of continuous service, instead of the earlier requirement of five years.
This change is part of India’s revamped labour framework, which officially comes into force from 21 November 2025 along with the implementation of the four Labour Codes — Code on Wages (2019), Industrial Relations Code (2020), Code on Social Security (2020) and the Occupational Safety, Health & Working Conditions Code (2020). These new laws replace 29 older labour regulations to simplify compliance and expand worker protection.
Labour law experts say this shift will result in a wider coverage of retirement benefits, particularly for sectors depending on project-based or short-term employment.
Rashmi Pradeep, Partner at Cyril Amarchand Mangaldas, noted:
“The extension of gratuity to fixed-term employees marks a significant departure from earlier legislation. Employers will now have to make more frequent gratuity payouts for shorter-duration roles.”
Expanded Definition of Wages
The reforms also broaden the scope of “wages” used for determining gratuity and other social security benefits:
- Wages now include basic pay + dearness allowance + retaining allowance
- At least 50% of total remuneration must be counted as wages
→ ensuring higher and more standardised gratuity calculations
This means many employees may receive larger payouts when they exit an organisation.
Impact on Employers & HR
Businesses must now:
- Update payroll systems to reflect the new wage structure
- Revise employment contracts & HR policies
- Recalculate their gratuity liabilities under the shorter eligibility rule
Fixed-term hiring may become more structured and regulated, offering better protections for workers.
Extended Worker Protections
The broader labour reform package also includes:
- Annual free health check-ups for workers above 40 years
- Timely wage payment rules for improved financial security
- Mandatory ESIC coverage for hazardous occupations, even if only one worker is employed
- Gig & platform workers formally recognised for the first time
- Aggregators to contribute 1–2% of turnover (capped at 5% of payouts)
- Benefits made portable nationwide through Aadhaar-linked UAN
In essence, the new gratuity framework—alongside the comprehensive labour overhaul—creates a more inclusive, equitable, and future-ready employment system benefiting both traditional and digital-era workers.
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