“New Labour Codes: Gratuity Eligibility Cut to 1 Year – Key Benefits for Indian Employees”

The Indian government has introduced a major update to the gratuity rules, cutting the eligibility period from five years to just one year. This policy shift is designed to improve employee welfare, simplify the gratuity system, and offer stronger financial security for workers across various sectors.

🟦 Who Will Benefit From the New Rule?

The biggest beneficiaries of this change are fixed-term employees (FTEs)—workers hired for a specific duration or project.
After completing 1 year of continuous service, they will now qualify for gratuity, giving them:

• Better financial protection

• Improved stability during job changes

• Access to benefits similar to permanent employees

🟦 Key Features of the Updated Gratuity Rule

✔ 1. Eligibility Reduced to 1 Year

Fixed-term employees can now claim gratuity after one year, instead of the previous five-year requirement.

✔ 2. Expanded Definition of “Wages”

The new labour codes broaden the definition of wages, which increases the base amount used for gratuity calculations—resulting in higher payouts.

✔ 3. Faster Gratuity Payment Timeline

Employers must release the gratuity amount within 30 days.
Failing this deadline will attract a 10% annual interest penalty.

✔ 4. Higher Salary Structure for FTEs

Fixed-term employees must now receive:

• The same salary framework as permanent employees

• Leave benefits

• Medical support

• Social security measures

This step is expected to reduce excessive contractual hiring and encourage direct employment.

🟦 Impact on Employees and Employers

🔹 For Employees

• Faster access to financial benefits

• Improved job security

• Better salary and welfare structure

🔹 For Employers

• HR and payroll systems must be updated to match the new wage definition

• Clearer compliance needs under the new labour codes

• Encouragement to hire workers directly rather than through contractors

🟦 When Is Gratuity Payable?

Gratuity becomes payable when an employee completes the minimum required service and then:

• Retires

• Resigns

• Reaches superannuation

• Faces death or permanent disability due to illness or accident

👉 In cases of death, gratuity is paid to the nominee or legal heirs.
If the recipient is a minor, the amount will be deposited with the controlling authority, who will invest it in a secure financial institution until the minor becomes eligible to receive it.

🟦 Where Do These Rules Apply?

These rules cover every:

• Factory

• Mine

• Oilfield

• Plantation

• Port

• Railway company

• Shop or establishment with 10 or more employees at any point in the last 12 months

🟦 How Is Gratuity Calculated? (Easy Formula)

Gratuity is computed as:

💡 Gratuity = (Last Drawn Salary × 15/26 × Years of Service)

Where:

• Last drawn salary = Basic + Dearness Allowance

• 15 = Number of working days considered for calculation

• 26 = Average number of working days in a month

• Years of service = Total completed years (rounded to nearest full year)

🔸 Maximum Limit

The highest gratuity amount legally allowed under the Payment of Gratuity Act, 1972 is ₹20 lakhs.
Even if the calculated amount is higher, an employee will receive up to ₹20 lakhs only.

🔸 Tax Benefit

Gratuity received under this rule is fully tax-free, offering additional financial relief.