Learn how India’s new Labour Code provides gratuity after one year for fixed-term employees and expands the wage definition for benefit calculations.
India’s labour landscape is undergoing a major transformation with the implementation of the new labour code from 21 November 2025. One of the most significant reforms relates to gratuity eligibility and wage computation. Employees working on fixed-term contracts can now become eligible for gratuity after just one year of continuous service, while the definition of wages used for gratuity calculations has also been broadened.
These changes are expected to improve social security benefits for millions of employees and encourage organisations to reassess their compensation structures and long-term liabilities.
What Is Changing Under the New Labour Code?
The new labour code consolidates multiple labour legislations into four comprehensive codes, including the Code on Social Security, 2020 and the Code on Wages, 2019.
The revised gratuity framework introduces two major changes:
- Fixed-term employees become eligible for gratuity after completing one year of continuous service with the same employer.
- The definition of wages has been standardised, ensuring that wages constitute at least 50% of total remuneration for gratuity and other social security calculations.
These provisions aim to bring greater fairness to employees engaged in contract-based or project-oriented roles.
Gratuity Eligibility: Old Rules vs New Rules
| Particulars | Earlier Rules | New Labour Code Rules |
| Eligibility for permanent employees | 5 years of continuous service | No change |
| Eligibility for fixed-term employees | Generally not eligible before 5 years | Eligible after 1 year of service |
| Wage definition for gratuity | Basic salary and DA considered | Broader definition with 50% remuneration threshold |
| Coverage | Mostly regular employees | Includes more fixed-term and contractual workers |
The revised framework significantly expands gratuity coverage, especially in industries where contractual hiring is common.
Why the One-Year Eligibility Rule Matters
Under the previous system, employees working on short-term assignments frequently missed out on gratuity benefits despite contributing several productive years.
Consider this example:
An employee joins a technology company on a two-year fixed-term contract and completes 18 months of service before the project concludes.
Earlier scenario
- Gratuity was generally unavailable because the employee had not completed five years of service.
Under the new labour code
- The employee may now qualify for gratuity benefits after completing one year of continuous service.
This reform particularly benefits professionals working in sectors such as:
- Information technology
- Manufacturing
- Startups
- Logistics
- Consulting services
- Business process outsourcing
Employees who frequently move between projects can now build a stronger retirement corpus over time.
Expanded Definition of Wages
Another notable aspect of the new labour code is the revised wage structure.
Previously, companies often designed salary packages with a lower basic salary and higher allowances, which reduced gratuity payouts.
Under the revised rules:
Wages include
- Basic salary
- Dearness allowance
- Retaining allowance
In addition, if excluded components exceed 50% of total remuneration, the excess amount may be added back while calculating wages.
Illustration
Suppose an employee receives an annual package of ₹12 lakh.
| Component | Earlier Structure | Revised Framework |
| Basic salary | ₹3.6 lakh | ₹6 lakh |
| Allowances | ₹8.4 lakh | ₹6 lakh |
| Gratuity calculation base | ₹3.6 lakh | ₹6 lakh |
A higher wage base means employees could receive substantially larger gratuity payments upon exit.
Impact on Employers
While employees stand to gain, organisations may experience higher financial obligations.
Companies relying heavily on project-based hiring models will need to prepare for:
1. Increased Gratuity Costs
Earlier eligibility means gratuity liabilities may arise much sooner than before.
2. Payroll Restructuring
Human resource teams will have to review salary compositions to comply with the 50% wage requirement.
3. Better Workforce Planning
Employers may revisit contract durations, retention strategies and budgeting processes.
Businesses should also conduct periodic actuarial assessments to estimate future gratuity obligations.
Additional Labour Reforms Introduced
The gratuity amendments are only one part of the broader reforms introduced under the new labour code.
Some other notable measures include:
Annual Health Check-ups
Employees above the age of 40 are entitled to free annual medical examinations.
Wider ESIC Coverage
Establishments employing fewer than ten workers can voluntarily opt for coverage under the Employees’ State Insurance Scheme. However, businesses involved in hazardous activities may have mandatory enrolment requirements.
Recognition of Gig and Platform Workers
For the first time, workers associated with digital platforms have received formal recognition under labour laws. Aggregators may contribute between 1% and 2% of annual turnover towards social security schemes, subject to prescribed limits.
Portable Benefits
An Aadhaar-linked Universal Account Number enables workers to access benefits seamlessly across states and employers.
How Employees Can Assess Their Benefits
Employees should proactively evaluate the implications of the revised gratuity framework.
A few practical steps include:
- Reviewing employment contracts to understand whether they qualify as fixed-term engagements.
- Examining salary structures to identify the proportion allocated towards basic wages.
- Using a gratuity calculator to estimate expected payouts under the revised wage definition.
- Discussing gratuity provisions with the HR department to clarify eligibility conditions.
Professionals may also compare their take-home pay under different compensation structures through a salary calculator to understand how salary revisions affect long-term benefits.
Is Gratuity Enough for Retirement?
Gratuity can provide a useful financial cushion at the time of retirement, resignation or career transition. However, it is generally designed as a one-time payment and may not adequately replace regular income after retirement.
For example, even a gratuity corpus of Rs. 15–20 lakh may not sustain an individual for two decades or more after retirement, especially considering inflation and healthcare expenses.
Employees should therefore view gratuity as only one component of their retirement strategy.
Combining gratuity benefits with suitable pension plans, provident fund accumulations and long-term investments can help create a more dependable income stream during retirement.
Final Thoughts
The introduction of one-year gratuity eligibility for fixed-term employees marks one of the most employee-friendly reforms under the new labour code. By widening access to gratuity and strengthening the wage definition, the government aims to provide better financial protection to contract workers and professionals engaged in evolving employment arrangements.
For employees, the changes translate into earlier access to retirement benefits and potentially higher payouts. For employers, they necessitate careful planning, payroll adjustments and proactive compliance measures.
Understanding these reforms today can help both organisations and workers make informed financial decisions and maximise the long-term value of employment benefits.
(India CSR)
