Gratuity After 1 Year of Service: New Labour Code Rule Effective After 21 Nov Explained

For decades, the standard rule was simple: five years of continuous service. That was the magic number an employee had to hit to qualify for gratuity—that lump-sum thank you note from your employer. If you left a day early, you walked away empty-handed. It was a retention tool, but it felt deeply unfair to the growing number of workers on short-term contracts.

Well, that five-year mandate has finally met its match.

As a personal finance and employee benefits strategist, I’ve been tracking the journey of India’s four new Labour Codes for years. The recent government announcement of New Labour Code, effective November 21, 2025, that implements key provisions of these codes, brings one of the most significant and welcome changes to the employee benefits landscape: Gratuity eligibility is now reduced to just one year of service for a key segment of the workforce.

Also Read-Govt Introduces New Labour Law Codes Reforms 2025: What Every Indian Worker Must Know

If you’re a Fixed-Term Employee (FTE), or you hire them, this update fundamentally changes your Financial Planning and Compliance strategy. I want to walk you through exactly what changed, who benefits, and what you Need to Know right now.

What Changed After 21 November?

The Union government has now operationalised the four New Labour Codes, which consolidate 29 earlier labour laws into a simplified framework for wages, industrial relations, safety and social security. As part of this package, the Code on Social Security, 2020 has been brought into force to reorganise benefits like EPF, ESIC, maternity benefits and gratuity under a single code.​

Within this code, Section 53 specifically relaxes the gratuity eligibility requirement for fixed‑term employees (FTEs) from five years to one year of continuous service, with gratuity payable on a proportionate basis. Multiple explainer articles and government communication around the 21–23 November rollout highlight this change as a flagship worker‑friendly reform, alongside minimum wage uniformity, expanded social security, and improved protections for gig and platform workers

The Core Change: One Year for Fixed-Term Employees (FTEs).

The biggest headline from the implementation of the new Labour Codes—specifically the Code on Social Security, 2020—is the dramatic shift in gratuity eligibility.

Under the previous Payment of Gratuity Act, 1972, most employees needed to complete a minimum of five years of continuous service to receive gratuity. This five-year cliff often left fixed-term workers, who are crucial to many project-based sectors like IT, media, and manufacturing, out in the cold.

Parity with Permanent Staff.

The new rule rectifies this long-standing inequity. Now, fixed-term employees are explicitly entitled to:

• Pro-rata gratuity after completing just one year of service.
• All statutory benefits—including social security, leave, and medical benefits—on par with permanent employees doing the same work.
• The same salary structure and wages as permanent employees.

Interesting Fact:

This move is a direct attempt to formalize the employment relationship and discourage employers from using short-term contracts solely to avoid paying statutory benefits. It grants legitimacy and protection to the modern, project-based work economy.

Who Exactly Is a Fixed-Term Employee (FTE)?

The term “fixed-term employee” is crucial here, as this change primarily targets this specific category. The new Codes formally recognise fixed-term employment as a legitimate engagement model, but it comes with a condition: full parity in benefits.

Defining FTEs.

A Fixed-Term Employee is an individual hired under a contract that:

• Specifies a predetermined end date.
• Terminates automatically upon the completion of a specific task or project.
• Is typically used in sectors requiring temporary but skilled talent for defined projects.

I want to be clear: this one-year rule applies specifically to fixed-term employees. For most permanent employees falling under the traditional gratuity framework, the five-year service rule is still the general benchmark for full eligibility. The new Codes introduce the concept of pro-rata gratuity for FTEs for shorter tenures, recognizing the time-bound nature of their employment.

Who Actually Gets Gratuity After 1 Year?

The phrase “gratuity after 1 year of service new labour code” is technically accurate but applies to a specific category of workers: fixed‑term employees. A fixed‑term employee is hired through a written contract for a clearly defined period or project, which automatically ends on the agreed date or on completion of the work.

Under the new regime, these fixed‑term employees are now entitled to:

• Gratuity after completing one year of continuous service, even if the contract itself ends at that point.​
• Parity with permanent staff in key areas such as wages, leave, medical benefits and social security coverage.

Fixed‑Term vs Permanent Employees.

For permanent (regular) employees, the basic eligibility rule has not changed: they still need at least five years of continuous service with an establishment to qualify for gratuity, except when service ends due to death or disablement. Media explainers on the new codes explicitly clarify that the reduced one‑year threshold is meant only to address the unique nature of fixed‑term work and does not shorten the standard five‑year rule for regular staff.​

So in short:

• Fixed‑term employees: eligible for gratuity after one year of continuous service (proportionate to tenure).​
• Permanent employees: typically eligible after five years of continuous service, though case law sometimes treats 4 years + 240 days of work as meeting the five‑year threshold in specific fact situations.

What Counts As “One Year of Continuous Service”?

The concept of “continuous service” is inherited from the Payment of Gratuity Act and carried into the new framework. Courts and official guidance interpret one year of continuous service broadly as working a minimum number of days in the preceding 12 months, even if there are weekly offs and certain authorised absences.​

Under Section 2A of the Payment of Gratuity Act, an employee is deemed to be in continuous service for one year if they have actually worked:

• At least 240 days in the last 12 months in most establishments with a six‑day work week.​
• At least 190 days in some categories like underground mines or where the employee works below ground.​

These deeming provisions are expected to guide how “one year” will be read for fixed‑term employees under the labour code as well, unless the rules prescribe something more specific.

How The New Gratuity Calculation Works.

The basic formula for gratuity hasn’t drastically changed, but the eligibility window has. The amount is calculated on a pro-rata basis, which simply means “in proportion” to the service period.

The Gratuity Formula.

The standard formula remains:

What “Years of Service” Means for FTEs After 1 Year:

For an FTE completing more than six months in the final year of service, that period is generally rounded up to a full year for calculation purposes under the Gratuity Act. With the new rule, an FTE who completes a one-year contract is now fully eligible for this payout, based on their one year of service.

For instance, if an FTE completes a 14-month contract, they would now receive gratuity proportional to that period, having crossed the one-year eligibility threshold.

Expert Quote:

Mahesh Krishnamoorthy, Managing Director of Core Integra, noted that the new rules ensure that fixed-term workers are “eligible for pro-rata gratuity even for a fixed-term engagement of just one year,” ensuring fairness in short-term roles.

️ The Larger Impact on Employers and Employees.

The shift to a one-year eligibility period is not just a minor tweak; it’s a structural change that impacts hiring practices, payroll, and financial security.

For Employees: Greater Financial Security.

• Protection for Job Switchers: In today’s dynamic job market, people switch jobs frequently. This new rule protects a significant financial benefit for those who don’t stay for a full five years, providing a stronger financial cushion between roles.
• Dignity in Contract Roles: It elevates the status of fixed-term employment, ensuring these workers receive a statutory “thank you” for their contribution, making project-based work a more viable and secure long-term career path.

For Employers: Compliance and Cost Implications.

• Mandatory Parity: Employers can no longer offer a fixed-term contract to skirt around statutory benefits. They must offer the same wages, working conditions, and benefits (like gratuity and social security) as a permanent employee.
• Increased Liability: The liability for gratuity accrues much sooner—after one year instead of five. HR and finance departments need to update their payroll systems and balance sheets to account for this accelerated provisioning.
• The Wage Definition Change: The new Codes introduce a uniform and broader definition of “Wages.” This new definition caps the non-statutory allowances (like HRA, conveyance, etc.) at 50% of the total pay. If allowances exceed 50%, the excess must be added back to the statutory wage component (Basic + DA), which will directly *increase* the base amount on which gratuity, PF, and other benefits are calculated. Compliance here is critical.

The Implementation Timeline: What’s Effective Now.

The four Labour Codes—The Code on Wages, 2019; The Code on Social Security, 2020; The Industrial Relations Code, 2020; and The Occupational Safety, Health and Working Conditions Code, 2020—have been enacted by the Parliament. The government has now officially announced the implementation of key provisions within these codes, effective from November 21, 2025.

While the final, state-level rules (the fine print) are still being fully finalized and notified, the core legal provision in the Code on Social Security, 2020, concerning the one-year gratuity eligibility for fixed-term workers, is now an active part of the legal landscape.

My takeaway for you is this: Do not wait for the final rule-book to be published in every state. The direction of the reform is clear, and the core mandate for FTE gratuity is in effect. Companies must begin updating their employment contracts and payroll provisioning mechanisms immediately to ensure compliance with this new reality.

⚖️ Disclaimer:

References & Authority Resources.

• The Code on Social Security, 2020, Section 53: Official Government of India text covering the revised provisions for gratuity eligibility.
• Ministry of Labour & Employment, Government of India (PIB): Official Press Information Bureau Releases regarding the implementation and key highlights of the Labour Codes.
• Economic Times / India Today News Analysis: Expert commentary and articles detailing the implementation and impact on fixed-term employees.
• Core Integra (Mahesh Krishnamoorthy, MD): Expert commentary confirming the pro-rata gratuity benefit for FTEs after one year.

C.K. Gupta

Hello, I am C.K. Gupta Founder of Taxgst.in, a seasoned finance professional with a Master of Commerce degree and over 20 years of experience in accounting and finance. My extensive career has been dedicated to mastering the intricacies of financial management, tax consultancy, and strategic planning. Throughout my professional journey, I have honed my skills in financial analysis, tax planning, and compliance, ensuring that all practices adhere to the latest financial regulations. My expertise also extends to auditing, where I focus on maintaining accuracy and integrity in financial reporting. I am passionate about using my knowledge to provide insightful and reliable financial advice, helping businesses optimize their financial strategies and achieve their economic goals. At Taxgst.in, I aim to share valuable insights that assist our readers in navigating the complex world of taxes and finance with ease.