New Gratuity Rules Explained: Does One Year of Service Make Every Employee Eligible?

India’s new labour-code framework has changed certain gratuity provisions, but the widely shared claim that every employee can now receive gratuity after completing only one year in a job is misleading.

The one-year benefit is specifically available to eligible fixed-term employees directly hired by an employer under a written contract for a defined period. Regular permanent employees and workers supplied through contractors do not automatically qualify for gratuity after one year. For most employees, the general requirement of five years of continuous service continues to apply.

Understanding this distinction is important before resigning from a job or making a gratuity claim.

What is gratuity?

Gratuity is a statutory payment made by an employer to an eligible employee in recognition of continuous service. It generally becomes payable when employment ends because of resignation, retirement, superannuation, death, disablement or another qualifying event prescribed under the law.

The gratuity provisions are now governed by the Code on Social Security, 2020, which came into effect on November 21, 2025. The Ministry of Labour and Employment has also issued official clarifications explaining how the revised rules apply to different categories of workers. Ministry of Labour’s gratuity FAQs

Who can receive gratuity after one year?

An employee appointed directly by an establishment for a fixed period may qualify as a fixed-term employee. According to the Labour Ministry’s clarification, such an employee becomes eligible for gratuity after completing one year of service under the contract.

This provision is meant for employees whose employment has a predetermined end date but who are hired directly by the organisation and receive benefits comparable to those available to permanent employees performing similar work.

For example, if a company directly appoints an individual under a two-year fixed-term employment contract and that employee completes at least one year, the employee may become eligible for gratuity under the applicable rules.

The benefit is not based merely on an employee being informally described as “temporary” or “contractual.” The nature of the appointment letter and the legal relationship with the employer are crucial.

Does the one-year rule apply to permanent employees?

No. A regular employee does not become eligible for gratuity merely by completing one year in an organisation.

For permanent employees, gratuity is ordinarily payable after at least five years of continuous service when they resign, retire or reach the age of superannuation. Therefore, a permanent employee who voluntarily leaves after one or two years would generally not qualify merely because the new labour codes have been implemented.

The five-year condition is waived in certain cases, including death or disablement. In these situations, gratuity may become payable even if the employee has not completed five years.

Are contract workers also covered after one year?

A contract worker supplied by an outside manpower agency or contractor should not be confused with a fixed-term employee.

The Ministry of Labour has clarified that fixed-term employment covers employees engaged directly by the employer. A worker placed at a company through a contractor remains an employee of that contractor for this purpose.

For contract labour, the employer responsible for gratuity is generally the contractor, and the usual five-year continuous-service condition applies. Simply working at the same client’s premises for one year does not automatically make the worker eligible under the special fixed-term provision.

This distinction is one of the most important facts missing from many reports about the “one-year gratuity rule.”

What if a fixed-term contract lasts less than one year?

An employee engaged under an 11-month fixed-term contract does not ordinarily meet the one-year threshold merely because the employment was fixed-term.

The Labour Ministry says a fixed-term employee must render service under the contract for one year from its starting date to qualify. Eligibility can therefore depend on the precise appointment and termination dates recorded in the employment documents.

Employees should keep copies of their appointment letter, contract extensions, salary slips and attendance records in case a dispute arises.

When does gratuity become payable?

Under the current framework, gratuity may become due in the following circumstances:

• Retirement or superannuation

• Resignation after completing the applicable service requirement

• Termination of employment

• Death of the employee

• Disablement caused by accident or disease

• Expiration of an eligible fixed-term employment contract

• Any additional event notified by the government

The five-year requirement is not necessary in cases of death, disablement or expiry of qualifying fixed-term employment. The Labour Ministry’s official FAQs confirm these exceptions. Official Labour Codes FAQs

How is gratuity calculated?

For a monthly rated employee, gratuity is generally calculated using the following formula:

Gratuity = Last drawn eligible monthly wages × 15 ÷ 26 × completed years of service

The definition of wages under the labour codes is important because it determines which salary components are included in the calculation. Basic pay and dearness allowance ordinarily form part of wages, while exclusions are governed by the statutory definition and the 50% rule applicable to excluded allowances.

For fixed-term employees, gratuity is calculated proportionately according to the applicable period of service and legal provisions. The actual amount may also depend on the employee’s wage structure, appointment category and service record.

Employees should obtain a written calculation from the employer rather than relying entirely on an online gratuity calculator.

Can an employer withhold or forfeit gratuity?

An employer cannot refuse gratuity simply because an employee resigned, joined a competing organisation or had an ordinary workplace disagreement.

However, gratuity may be forfeited in specific circumstances permitted by law. If an employee’s service is terminated for an act, wilful omission or negligence that causes financial damage to the employer, gratuity may be reduced to the extent of the proven loss.

Gratuity may also be forfeited wholly or partly when employment is terminated for riotous or disorderly behaviour, an act of violence, or an offence involving moral turpitude committed in the course of employment.

Forfeiture is not meant to be automatic. The employer must have a legally sustainable reason, establish the alleged misconduct and follow applicable disciplinary and procedural requirements. A vague accusation of poor performance is generally not the same as misconduct covered by the forfeiture provisions.

How soon should gratuity be paid?

Once gratuity becomes payable, the employer must determine the amount and notify the eligible person. Under the Code on Social Security, payment should ordinarily be arranged within 30 days.

If payment is delayed, interest may become payable unless the delay occurred because of the employee’s fault and the employer obtained the required permission for withholding interest.

In the event of a disagreement over eligibility or calculation, the employee or employer may approach the competent authority under the prescribed procedure.

What should employees check?

Before claiming gratuity after one year, workers should first identify their correct employment category. Important documents include:

• Appointment or employment contract

• Contract start and expiry dates

• Name of the actual employer

• Salary slips and bank statements

• Attendance and service records

• Resignation, retirement or termination letter

• Details of any contractor or staffing agency involved

The appointment letter should clearly indicate whether the individual was hired directly for a fixed term. An employee working through a third-party agency should check which organisation is legally identified as the employer.

The truth about the new one-year rule

The revised provision offers meaningful protection to eligible fixed-term employees, particularly those hired directly for time-bound assignments. It ensures that they do not lose gratuity merely because their employment contract is shorter than five years.

However, it does not reduce the general gratuity requirement from five years to one year for the entire workforce. Permanent employees and workers hired through contractors remain subject to their respective eligibility conditions.

Anyone planning to resign or submit a gratuity claim should review the appointment letter, confirm the employment category with HR and consult the competent labour authority or a qualified professional if the employer disputes eligibility.

Disclaimer: This article is intended for general information and legal awareness. Gratuity eligibility depends on the applicable law, employment category, establishment, service record and facts of each case. Employees should seek professional or official guidance before making a legal claim.