Gratuity — a retirement benefit long seen as a reward for long-term loyalty — is undergoing one of the most significant transformations in Indian labor history. Government notifications tied to the rollout of the new Unified Labour Codes have fundamentally changed who qualifies, when they qualify, and how benefits are calculated.
Under the revamped framework, many workers — especially fixed-term and contract employees — can now claim full gratuity after just one year of continuous service, instead of the traditional five years. This reform dramatically strengthens worker protections, expands social security coverage, and modernizes India’s employee benefit landscape.
Gratuity Rules 2026 Explained
Gratuity Defined
Gratuity is a statutory financial benefit paid by an employer to an employee upon the end of employment — as a “thank you” for years of service. Traditionally, it’s governed by the Payment of Gratuity Act, 1972, which requires gratuity payments when an employee retires, resigns, or exits after continuous service of at least five years.
Purpose of Gratuity:
- Provide financial security at retirement or exit
- Compensate for dedication and long-term service
- Act as a supplemental retirement fund
Old Rules vs New Rules Key Highlights
| Feature | Old Rule (Pre-2025) | New Rule (Post Labour Codes) |
| Minimum service for gratuity | 5 years | 1 year (only for fixed-term/contract) |
| Applies to | Permanent employees with ≥5 yrs | Fixed-term & contract employees with ≥1 yr |
| Gratuity calc based on | Last drawn salary | Same method, but with broader “wage” definition |
| Maximum limit | ₹20 lakh | Still capped (subject to final govt notification) |
| Legal Basis | Payment of Gratuity Act, 1972 | Labour Codes |
| Official Website | https://clc.gov.in/ | |
Historic Shift: New Labour Codes and Gratuity Reform
In late 2025, the Government of India officially notified the new Labour Codes, rationalising 29 old labour laws into four modern codes covering wages, industrial relations, social security, and occupational safety.
Under these reforms, gratuity rules saw transformative changes — particularly for fixed-term and contractual employees.
Key Change (Effective Nov 21, 2025 / 2026 Rollout):
- Fixed-term and contract workers can now claim gratuity after just one year of continuous service.
This is a watershed moment, breaking decades of practice where gratuity was exclusive to long-term employees with 5+ years of service.
Important Distinction
- Permanent employees still generally require five years of continuous service for gratuity under the updated rules.
- The one-year eligibility rule applies primarily to Fixed-Term and similar contract workers.
This ensures short-term and project-based workers finally gain access to benefits long denied to them.
Who Qualifies for 1-Year Gratuity?
A. Fixed-Term Employees (FTEs)
Fixed-Term Employees are those engaged under written contracts for a specified period or project. They are not permanent staff, but perform duties similar to full-time employees.
Key benefit: They are now entitled to gratuity after completing just 1 year of continuous service.
B. Contract and Temporary Workers
Many industries increasingly use contract staff — for seasonal, cyclical or project-related work. Under the new labour codes:
- Contract and temporary workers receive equal benefits as permanent workers.
- Their gratuity eligibility is also pegged at one year of continuous employment.
C. Gig and Platform Workers
For the first time, the codes define gig and platform workers and connect them to social security benefits — including gratuity eligibility mechanisms tied to service and contributions.
How Is Gratuity Calculated?
While eligibility has changed, the core gratuity calculation formula currently remains similar:
Gratuity = (Last Drawn Wages × 15/26) × Years of Service
Where:
- Wages generally refers to basic pay + dearness allowance (DA) + retaining allowance — with enhanced definitions under the new codes.
- 15/26 is based on 15 days’ wages per year of service.
- Years of Service is totaled based on continuous employment.
New Wage Definition (Impact on Gratuity Payouts)
Under the updated codes: Wages for gratuity calculation must be at least 50% of total remuneration (or otherwise adjusted).
This often increases the “wage” amount used in the formula, producing higher gratuity payouts for employees, especially in companies where allowances historically overshadowed basic pay.
Practical Example: How Much Will You Get?
Let’s compare an example under old vs new rules:
| Scenario | Old Law | New Law |
| Last drawn wage | ₹30,000 | ₹30,000 (but adjusted to ₹36,000 based on 50% wage rule) |
| Service | 2 years | 2 years (eligible under new rule) |
| Gratuity | Not eligible | (₹36,000 × 15/26) × 2 = ₹41,538 |
Under the new rules, the employee is now eligible and receives a meaningful gratuity amount, even with just two years in service.
When and How Is Gratuity Paid?
Triggering Events
Gratuity becomes payable when the employee:
- Resigns after completing the minimum required service
- Retires upon superannuation
- Is terminated by the employer
- Dies or becomes permanently disabled (special provisions may apply)
Timeline
Once gratuity is due, employers are expected to pay it within a fixed statutory period. Delay beyond that may attract penal interest and legal consequences for employers.
Employers: What You Must Know
With these reforms, employers must update policies and payroll operations immediately. Here’s what HR and finance teams must focus on:
A. Identify Eligible Employees
List fixed-term, contract and temporary workers with ≥1 year service.
B. Redesign Salary Structures
Ensure wages meet the 50% rule for gratuity calculations.
C. Update Contracts
Offer appointment letters and contractual terms reflecting uniform benefits.
D. Accounting and Actuarial Liabilities
Companies must now recognize enhanced gratuity liabilities on financial statements. Under accounting standards such as Ind AS 19, labour code changes may require immediate profit & loss recognition of past service costs.
Implications for Employees and Employers
Employees
- Short-term and contract workers now gain financial security from gratuity.
- Higher payouts are possible due to broader wage definitions.
- More equitable treatment with permanent staff.
Employers
- Increased compliance obligations.
- Higher gratuity liabilities and accounting impacts.
- Need to revise engagement models.
Overall, the reforms shift India closer to modern labor frameworks seen in more developed economies.
The 2026 gratuity reforms usher in a more equitable and inclusive era for India’s workforce. By reducing the entry threshold and broadening the definition of wages:
- Millions of short-term, contract, and gig economy workers gain access to a critical retirement benefit they were previously denied.
- Employers must modernize HR policies and strengthen compliance processes.
- The labour ecosystem becomes more transparent, competitive, and future-ready.
Whether you’re an employee planning your career or an HR professional steering compliance — understanding these changes is essential in the coming years.
FAQ’s
Q1. Does the 1-year rule apply to all employees?
No — the one-year gratuity eligibility applies mainly to fixed-term, contract, and equivalent workers. Permanent employees generally still require five years of service, except in cases of death, disablement or early termination.
Q2. What if my salary has many allowances?
For gratuity, ‘wages’ must be at least 50% of total remuneration. Excess allowances over this threshold are added back for calculation purposes, often increasing gratuity payouts.
Q3. Is the gratuity amount taxable?
Typically, gratuity up to a statutory limit (set by law, historically ₹20 lakh) is tax-exempt under the Income Tax Act. Any amount above this may be taxable. Official limits may be updated by the government.