Gratuity in 1 year, not 5! New Labour code brings big win for employees

New Delhi (The Uttam Hindu): The new labor code has significantly changed the rules for gratuity. Certain eligible employees can now receive gratuity after just one year of continuous service, compared to the five-year requirement previously.

Under these new labor laws, which come into effect in November 2025, fixed-term and contract employees will receive gratuity pro rata. However, permanent employees are still required to complete five years of service, but exemptions are granted in cases of death or disability, according to a report by NDTV Profit.

Fixed-term employees are those hired by companies on written contracts for a fixed period, typically one or two years. Gratuity for such employees will now be determined based on their length of service.

These new rules could ease access to post-retirement benefits for millions of workers in the country's formal sector. According to the new labor code, gratuity will be calculated based on salary, which must be at least 50 percent of the employee's total CTC (cost-to-company).

According to the Ministry of Labor, salary includes basic salary, dearness allowance (DA), retaining allowance, and other allowances paid to an employee. Employees who previously had a lower basic salary may now see a significant increase in their gratuity amount.

Gratuity is a legally mandated lump-sum payment made by an employer to an employee in recognition of his long service, usually after 5 years of service or retirement.

The Labor Ministry stated in its FAQ that these new gratuity rules will come into effect on November 21, 2025, and organizations will need to make provisions for this in their accounting rules. This means that only employees joining the job on or after November 21, 2025, will be able to claim gratuity after completing one year of continuous service.