Gratuity Rules: The government implemented new labor codes effective Friday, November 22, 2025. The new rules also included provisions regarding gratuity. According to the new rules, the number of years of continuous service required for employees to be eligible for gratuity payments has been reduced from the current five years to one, to strengthen welfare measures for workers. However, there is a catch. This rule does not apply to permanent employees.

Under the new rules, fixed-term employees will be eligible for gratuity after one year of service. A fixed-term employee is someone hired under a contract that has a predetermined end date or expires upon completion of a specific task or project.

Who will receive gratuity in one year?
Under the Payment of Gratuity Act, fixed-term employees were previously eligible for gratuity only after completing five years of continuous service at a particular location. With the implementation of the new Labor Code, this tenure requirement has been relaxed for Fixed Term Employees (FTEs). Such employees will now be eligible for gratuity after completing just one year of service. The Ministry clarified that the purpose of this change is to bring fixed-term workers at par with their permanent counterparts.

They will still receive gratuity only after five years
The service period requirement has been reduced, but only for fixed-term employees. Section 53 of the new Social Security Code states that the requirement of five years of continuous service will not be required if the fixed-term employment ends upon termination.

The new rules have not changed anything for permanent employees, and they will continue to receive social security benefits, but there are no changes to gratuity eligibility.

No changes have been made to the law for permanent (on-roll) employees. They will be eligible for gratuity only after completing five years of continuous service.

What is gratuity?
Many people are not aware of the meaning of gratuity. Let's find out what it is. Gratuity is a lump sum payment given by an employer to an employee as a token of appreciation for long-term loyal service. This payment is typically made upon retirement, resignation, or disability after completing at least five years with the company. It is covered under laws such as the Payment of Gratuity Act, 1972 of India.

It serves as a financial benefit to provide post-employment stability. It is calculated based on salary and years of service, serving as a reward for commitment and a cushion for the future.

What is the formula for calculating gratuity?
The standard gratuity calculation formula for employees covered under the Gratuity Act of India is: (Last Drawn Salary × 15/26 × Number of Years of Service), where "Last Drawn Salary" includes Basic + Dearness Allowance.

For example, if an employee has worked for a company for five years and his final Basic-plus-DA salary is ₹50,000, the gratuity will be: ₹50,000 * (15/26) * 5 = ₹1,44,230.

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