The Labour Codes 2025, which come into effect on November 21, 2025 and are also referred to as New Labour Codes 2025, are going to radically change the gratuity eligibility criteria. Previously, the FTEs (fixed-term employees) were not entitled to gratuity unless they had a minimum of five years’ service, now they will be entitled to gratuity after only one year of continuous service (which includes working a minimum of 240 days in that year). Thus, short-term workers, those with contracts or project-based roles will be entitled to gratuity even their total employment time is less than five years. The decision is made with a view to granting fixed-term employees the same exit benefits as permanent employees.
Impact on Employees – Fixed-Term vs Permanent
The main change here concerns the beneficiaries of fixed-term and contract employees specifically. The new ruling opens up gratuity even for short-duration roles because of the reduced qualifying period. However, permanent employees are still under the old rule: they are required to have five years of continuous service to be eligible for gratuity. As a consequence, the 1-year rule applies only to fixed-term or contract-based jobs and not across the board.
Revised Definitions: What Counts as “Wages” for Gratuity Computation
The redefinition of work terms, which heavily relies on the “wages,” is yet another big change coming with the new codes. The new requirement is that at least 50% of an employee’s total pay (CTC — Cost to Company) must be classified as “wages.” This change has a crucial and far-reaching impact—in the very computation of gratuity which is done based on wages (basic pay + dearness allowance, etc.), a higher wage component will attract higher gratuity payout. The result is that for many employees, the amount of gratuity under the new pay structure could be 25-50% more than that of the old gratuity calculation. Thus, even if you are eligible based on the 1-year rule, because of the change in wage definition, your final gratuity amount may still be better than what you had before.
When & How Gratuity Will Be Paid — And Employer Obligations
The new regulations state that:
- Gratuity should be disbursed at the time of exit (resignation, end of contract, retirement, etc.) of the employee who is eligible.
- It is the duty of the employer to pay the gratuity within a month after the employee’s termination or completion of the contract. If they take longer, then they may have to pay a fine which is equal to the unpaid amount at a rate of 10% per annum.
- The gratuity amount is calculated by applying the standard formula: Last drawn salary (basic + DA) × 15/26 × Years of service.
What This Means for Contractual & Short-Term Workers
The reform is revolutionary for contract, gig, and fixed-term workers all over India. Many workers of such nature previously had no long-term benefit for short-term service, but they are now able to claim a lump-sum gratuity after just one year. It gives more people in the workforce job security and social-security coverage. By treating fixed-term staff and permanent employees alike in terms of benefits (except for the five-year rule for permanents), the law cuts down on disparity and promotes fairness in the treatment of all workers.
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