Gratuity for contract employees in 1 year, rule of 5 years for permanent employees continues

India’s integrated labor codes, specifically the Social Security Code, 2020, have made significant changes in the eligibility of gratuity, which will come into effect from November 21, 2025. These reforms aim to provide greater social protection to workers working in non-permanent roles, while maintaining the safeguards established for regular employees.

Under the new rules, fixed-term employees (FTEs) and many contract workers—those employed directly by the employer through a written contract for a specific period—are now entitled to gratuity on a pro-rata basis only after completing one year of continuous service (usually a minimum of 240 working days). Earlier, the requirement of five years of continuous service under the ‘Payment of Gratuity Act, 1972’ was equally applicable to all. Gratuity for eligible fixed-term workers is paid immediately upon completion or termination of the contract.

In contrast, permanent or regular employees must still complete five years of continuous service to be eligible for gratuity. The only exceptions are cases in which the accident or illness results in death or disability; In such cases gratuity is paid regardless of the period of service.

### Calculation of Gratuity and Definition of ‘Wages’

Gratuity is still calculated using the standard formula: (last drawn wages × 15/26) × number of completed years of service (in which the part of the year in excess of six months is counted as a completed year).

Along with this, an important change is the revised definition of “wages” under the ‘Code on Wages’. Wages—which include basic pay, dearness allowance and retaining allowance—must be at least 50% of the employee’s total cost-to-company (CTC). If the allowances exceed 50%, the excess amount is added back into the wage base for statutory calculations like gratuity, PF and bonus. This restructuring is expected to increase gratuity payments for many employees, especially compared to the old structures where the basic salary was often kept low.

– Contract and fixed-term workers enjoy better financial security, as partial gratuity benefits are now available even in short-term roles. – Permanent employees may see continuity in long service terms, but may potentially benefit from a higher salary base.

– Employers will now have to more accurately provision for gratuity liability, especially for fixed-term appointments, and ensure that pay structures adhere to the 50% wage floor. These changes will be applicable from November 21, 2025 onwards; Service before this date will generally be considered under the old rules.

The Labor Ministry has issued a clarification confirming the further implementation of these changes and the eligibility criteria. These reforms are part of a broader process of converting 29 central labor laws into four codes, aimed at bringing greater inclusivity to India’s organized workforce.