Gratuity rules overhaul: Eligibility cut to 1 year of service from 5 years — Who is eligible?

The new labour codes have introduced significant changes to gratuity eligibility, allowing employees to receive gratuity after just one year of continuous service, down from the previous requirement of at least five years.

There has been some confusion earlier about whether the new labour codes were retrospective in nature. However, the government has clarified that gratuity under the new rules will apply from 21 November 2025.

“Gratuity will be applicable with effect from 21st November 2025 i.e. date of enforcement of the Code. Establishments may make provision as per accounting norms,” the Labour Ministry said in one of its FAQ documents.

This means that only workers who joined a company on or after the new labour codes were implemented will be eligible to receive gratuity after completing one year of continuous service with their employer.

However, the one-year gratuity rule does not apply universally to all employees. There is an additional eligibility condition that must be met for this provision to come into effect. Here's a detailed explanation of how the criterion works:

Who is eligible for gratuity pay after one year of service?

Under the new labour laws, the one-year gratuity rule applies only to fixed-term employees (FTEs) and contract workers on a pro rata basis. Permanent or regular employees still generally require five years of continuous service, unless in cases of death or disablement, for which separate rules apply.

Fixed-term employees are those hired for a specific period under a written contract, such as one year or two years, instead of being hired as permanent staff. In such cases, gratuity will be calculated on a pro rata basis, meaning employees will receive gratuity proportional to the period they actually worked, even if it is shorter than five years.

Under the updated framework, wages used for gratuity calculations will include basic pay, dearness allowance (DA) and retaining allowance, which together must constitute at least 50% of an employee’s total cost-to-company (CTC).

Will your gratuity payout rise under the new rules?

Since gratuity is calculated based on the last drawn wages and years of service, and basic salary is set to comprise a larger proportion of pay, the exit lump sum is also expected to increase.

An employee whose basic pay was historically set at 30% of their CTC could see a major jump in gratuity payouts as they shift to the 50% wage floor mandated under the new labour codes.

Experts told Mint that such a shift would translate into around 66% increase in gratuity payouts, since the benefit is calculated based on basic pay and dearness allowance.

They explained that under the new definition of “wages”, if an employee's sum of allowances exceeds 50% of CTC, the excess is automatically added back to the employee's basic pay.

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