For the first time in decades, fixed-term employees in India will receive gratuity after just one year of service — not five. The change, effective November 24, 2025, is part of a sweeping labor law overhaul under the Code on Social Security, 2020, and it’s set to reshape job security for millions. The Ministry of Labour and Employment confirmed the shift in October 2024, ending a 50-year rule that tied gratuity to five years of continuous service. This isn’t just a tweak. It’s a lifeline for India’s growing army of contract workers — nearly 15 million of them — who’ve long been excluded from benefits enjoyed by permanent staff.
How the new gratuity formula works
The math hasn’t changed, but who gets paid has. For companies covered under the Payment of Gratuity Act, 1972 (those with 10+ employees), the formula is: Gratuity = 15 × last drawn salary × completed years ÷ 26. For others, it’s ÷ 30. The difference? One uses working days (26), the other calendar days (30).
Take an employee earning ₹50,000 monthly (basic + dearness allowance). Under the old system? Nothing until year five. Now? After one year: ₹50,000 × 15 ÷ 26 = ₹28,846.15. For employers not covered by the Act, it’s ₹50,000 × 15 ÷ 30 = ₹25,000. That’s real money — enough to cover rent, medical bills, or a child’s school fee.
Here’s the catch: service must be completed. If you work 1 year and 5 months? That’s one year. Hit 1 year and 7 months? It rounds up to two. That’s critical. A worker at a Delhi-based IT firm who joined in March 2024 and leaves in October 2025? That’s 1 year, 7 months. They get paid for two full years — ₹57,692.30 if covered under the Act.
Who’s affected — and who’s not
This applies only to fixed-term contracts under the Code on Social Security, 2020. That covers nearly 90% of formal sector jobs — factories, retail chains, call centers, even tech firms using contract developers. But gig workers? Uber drivers, Swiggy delivery partners, freelance designers? They’re still outside the net. The Labour Bureau in Chandigarh estimates 15 million fixed-term workers are now eligible. That’s more than the population of Nepal.
And the salary? Only basic pay and dearness allowance count. HRA, transport allowance, bonuses? Excluded. The Employees’ Provident Fund Organisation in New Delhi is clear: no loopholes. Employers who try to game the system by splitting salaries will be audited.
The ₹20 lakh cap — and what happens beyond it
Even with the new rules, there’s a ceiling. The maximum tax-free gratuity remains ₹20,00,000. That’s unchanged since 2010, when it doubled from ₹10 lakh. If your calculated gratuity hits ₹22 lakh? ₹20 lakh is tax-free. The extra ₹2 lakh? That’s ex-gratia — nice, but taxable. Many large firms, especially in IT and manufacturing, already pay above this. Now they’ll have to track it separately.
Why this matters — and what experts say
"This isn’t just about money," says Rajesh Kumar Sharma, Director of Investment Advisory at Bajaj Finserv in Pune. "It’s about dignity. Fixed-term workers were treated as disposable. Now, they’re part of the social contract. Employers will think twice before cutting contracts short. Workers will stay longer. That’s stability. That’s growth."
Manufacturers in Tamil Nadu and retailers in Uttar Pradesh are already adjusting. One mid-sized auto parts supplier in Chennai told The Economic Times they’re rethinking contract durations — no more one-year stints. They’re moving to two-year contracts to avoid paying gratuity twice.
The Ministry of Labour and Employment has set up a helpline — 1800-11-1100 — and a portal at www.labour.gov.in for questions. But don’t wait. The deadline is November 24, 2025. Employers must update payroll systems. Workers must track their service dates.
What happens if payment is delayed?
Gratuity must be paid within 30 days of termination. Miss the deadline? The Employees’ Provident Fund Organisation imposes 8% simple interest per year. That’s not a penalty — it’s a legal obligation. A worker who leaves in January 2026 but gets paid in July? They’re owed interest for six months. That’s ₹721 on ₹28,846.15. Small, but enforceable.
What’s next?
Industry groups are pushing for clarity on how to handle employees who’ve worked 4.5 years under the old rules. Will they get pro-rata? The Ministry hasn’t said. Also unaddressed: what if a worker switches companies? The new law doesn’t allow service aggregation. So if you worked two years at Company A, then moved to Company B? You start fresh. That’s a gap.
And what about women? Many contract workers in garment factories or nursing homes are women. Will this help them build savings? Experts say yes — but only if employers stop using short-term contracts to avoid benefits. That’s the real test.
Frequently Asked Questions
Who qualifies for gratuity under the new rules?
Fixed-term employees who complete at least one full year of service with an employer covered under the Code on Social Security, 2020 qualify. This includes workers in factories, retail chains, IT firms, and other formal sector employers with 10 or more staff. Gig workers, casual laborers, and those in unorganized sectors remain excluded.
How is the gratuity amount calculated for a ₹50,000 salary?
For employers covered under the Payment of Gratuity Act, the calculation is (15 × ₹50,000 × 1) ÷ 26 = ₹28,846.15. For employers not covered, it’s (15 × ₹50,000 × 1) ÷ 30 = ₹25,000. Only basic salary and dearness allowance are included — no HRA or bonuses.
Is gratuity taxable?
Yes, but only above ₹20 lakh. The first ₹20,00,000 is fully tax-exempt under Section 10(10) of the Income Tax Act, 1961. Any amount paid beyond that — even if it’s a company’s voluntary bonus — is treated as ex-gratia and taxed as income. This cap hasn’t changed since 2010.
What if my service is 1 year and 5 months?
Only full years count. Six months or less in the final year are ignored. So 1 year and 5 months = 1 year of service. But if you work 1 year and 7 months? That rounds up to 2 years. This rounding rule applies to all calculations and can significantly impact final payouts.
Can I carry forward service from a previous employer?
No. The new rules do not allow service aggregation across employers. If you worked two years at Company A and then joined Company B, your gratuity clock resets. Each employer calculates based only on your tenure with them. This is a major limitation for contract workers who change jobs frequently.
When must employers pay gratuity?
Gratuity must be paid within 30 days of termination. Delayed payments attract 8% simple interest per year from the due date. The Employees’ Provident Fund Organisation enforces this strictly. Workers can file complaints through the labour department if employers miss the deadline.