India made the four Labour Codes effective from 21 November 2025. Under the Code on Social Security, 2020, an employee engaged under a genuine fixed-term employment contract becomes eligible for gratuity after one year of service under that contract. The general five-year continuous-service condition continues for employees who do not fall within an exception. Here is what the current rule means and who it affects.
Answer Engine Summary
India's four Labour Codes took effect on 21 November 2025. Under the Code on Social Security, 2020, a fixed-term employee qualifies for gratuity after one year of service under the contract. The general five-year continuous-service condition continues for regular employees unless another statutory exception applies.
Last updated: 3 August 2026
Educational information only. Verify applicability with official guidance and qualified professionals where needed.
Gratuity rule change at a glance: old vs new
The fixed-term exception is now in force: an eligible fixed-term employee qualifies after one year of service under the contract. Here is the current distinction in one view.
- Fixed-term employees: eligible after one year of service under the fixed-term contract
- Regular employees: the general five-year continuous-service condition continues
- Other statutory exceptions, including death or disablement, must be assessed separately
- Effective status: all four Labour Codes took effect on 21 November 2025
New Labour Code Gratuity — 1 Year vs 5 Year Rule
Who benefits, how it is calculated, and the effective date
Gratuity eligibility at a glance (2026)
Eligibility depends on the written contract and applicable legal conditions — not every contract worker automatically qualifies after one year.
| Employment situation | General eligibility explanation |
|---|---|
| Regular permanent employee | General five-year continuous-service rule, subject to statutory exceptions |
| Eligible fixed-term employee | One-year eligibility where the applicable legal provisions and contract conditions are satisfied |
| Death or disablement | Separate statutory exceptions may apply; the five-year condition does not apply |
What the New Labour Code changes for gratuity
The Code on Social Security, 2020 gives eligible fixed-term employees a specific one-year gratuity threshold. The Ministry of Labour's March 2026 FAQ confirms that one completed year under the contract is sufficient.
For regular employees, the general five-year continuous-service condition continues unless another statutory exception applies. A fixed end date in a genuine written employment contract is central to the fixed-term category; a short tenure by itself does not automatically make an employee fixed-term.
For calculation and rounding, use the current official rule and the exact completed service period rather than assuming that every fraction of a year is paid proportionately.
Practical Example: New 1-year rule — who benefits and by how much
An employee completes a written 3-year fixed-term contract with last-drawn eligible wages of Rs 60,000. Illustrative gratuity = Rs 60,000 × 15/26 × 3 = about Rs 1,03,846, subject to the Code, applicable rules, wage definition and current ceiling.
When did the Labour Codes take effect?
The Government of India announced that the four Labour Codes became effective on 21 November 2025. RupeeKit's earlier version of this article incorrectly described implementation as pending; that statement was corrected on 27 July 2026 after checking the official announcement and Ministry FAQs.
The Ministry of Labour and Employment subsequently published implementation material and FAQs. Its 16 March 2026 FAQ states that a fixed-term employee becomes eligible for gratuity after rendering one year of service under the contract.
Employers and employees should still check the current Central and applicable State rules, the written contract, and later notifications for procedure and case-specific application.
- Effective date: 21 November 2025
- Fixed-term gratuity threshold: one year under the contract
- General threshold for regular employees: five years, subject to statutory exceptions
- Check labour.gov.in and applicable State rules for current procedures
How to calculate your gratuity under current rules
Use the formula: Gratuity = (Last Basic + DA) × 15/26 × Number of completed years of service. Round the number of years: if service is 4 years and 7 months or more, round up to 5 years; below 7 months, round down.
Example: Basic salary Rs 45,000, DA Rs 0 (private sector), 7 years 8 months service → 8 years (rounded up). Gratuity = Rs 45,000 × 15/26 × 8 = Rs 2,07,692.
Use the RupeeKit Gratuity Calculator to estimate your gratuity quickly. For disputes, the Controlling Authority under the Payment of Gratuity Act is the Labour Commissioner of your state.
Death and disablement: separate statutory exceptions
The five-year continuous-service condition does not apply when employment ends due to death or disablement caused by accident or disease. In such cases gratuity is payable for the service actually rendered, and on death it is paid to the nominee or legal heirs.
These are statutory exceptions with their own conditions and procedures — nomination records (commonly maintained via the prescribed gratuity nomination form with the employer) matter here, so employees should keep nominations current and families should check with the employer and the applicable rules.
Common misconceptions about the 2026 gratuity rules
Several viral summaries of the Labour Codes overstate what changed. The points below separate the rule from the myth.
- Myth: every employee now gets gratuity after 1 year. Reality: the one-year threshold applies to eligible fixed-term employees under a qualifying written contract; regular permanent employees generally still need five years of continuous service.
- Myth: any short-tenure or contract worker automatically qualifies. Reality: engagement through a staffing agency or a short stint does not by itself create fixed-term status — the written contract terms and applicable legal conditions decide.
- Myth: gratuity is always tax-free. Reality: exemption limits differ by employee category and can change; verify the current ceiling before filing.
- Myth: gratuity is calculated on full CTC. Reality: the statutory formula uses last drawn basic plus DA (with wage-definition rules under the Code), not total CTC.
- Myth: resignation before five years always means zero gratuity. Reality: statutory exceptions (eligible fixed-term service, death, disablement) can still create entitlement.
Gratuity eligibility: 1-year vs 5-year rule
Searchers often see '1-year gratuity rule' and assume it applies to every employee or every contract worker. The key distinction is employment category and the applicable statutory conditions. Regular employees generally remain associated with the five-year continuous-service rule, while eligible fixed-term employment can have a different threshold.
Does every contract worker get gratuity after one year?
No. The label 'contract worker' by itself is not enough. Fixed-term employment, contractor-supplied labour and regular employment are different legal arrangements. Check the written contract, employment category and the applicable law before assuming the one-year provision applies.
What happens to the service rule on death or disablement?
Death and disablement can trigger separate statutory exceptions to the normal service-condition framework. The guide explains those exceptions at a high level; for a real claim, use the employer records and applicable labour-law guidance rather than relying on a generic calculator alone.
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Frequently Asked Questions
Can I get gratuity if I resign before 5 years?
The general rule under the Code on Social Security, 2020 requires five years of continuous service, but eligible fixed-term employees qualify after one year under the contract. Other statutory exceptions, including death or disablement, must be assessed separately.
Is gratuity taxable in India?
For employees covered under the Payment of Gratuity Act, gratuity up to Rs 20 lakh is fully tax-exempt under Section 10(10)(ii) of the Income Tax Act. Any gratuity above Rs 20 lakh is taxable as income. For government employees, gratuity is completely tax-free without any limit under Section 10(10)(i).
What is a fixed-term employment contract?
A fixed-term employment contract is a written employment agreement for a fixed period. Under the Labour Code framework, eligible fixed-term employees receive statutory benefits comparable to permanent workers doing similar work and qualify for gratuity after one year of service under the contract.
Does the New Labour Code affect gratuity for IT companies?
The one-year rule can apply in IT, BPO or staffing businesses when the employee is genuinely engaged under a qualifying fixed-term employment contract. Industry alone does not decide eligibility; verify the written contract, service period and applicable rules.
What are the new gratuity rules for permanent employees in 2026?
For permanent (regular, open-ended contract) employees, the gratuity rules under the Code on Social Security, 2020 (effective 21 November 2025) keep the general 5-year continuous-service condition, and the formula remains (Basic + DA) × 15/26 × years of service. Verify the current tax-free ceiling and exemption applicable to your case from official sources before filing a return. The 1-year eligibility rule applies only to eligible fixed-term contract employees, not permanent staff.
Where can I download the official New Labour Code gratuity rules PDF?
Use the Ministry of Labour and Employment Labour Codes page and FAQs, including the additional FAQs dated 16 March 2026, or India Code for the official text. The Government's 21 November 2025 PIB release records the effective date. Avoid relying on undated third-party summaries.
Is gratuity available after one year for every employee?
No. The one-year rule is not a universal replacement for the general five-year rule. It depends on the employment category and the applicable statutory conditions.
Do all contract workers qualify for gratuity after one year?
No. 'Contract worker' and 'fixed-term employee' are not interchangeable labels. Eligibility depends on the actual employment arrangement and the law that applies to it.
Is five years required when gratuity becomes payable because of death or disablement?
Separate statutory exceptions may apply in death or disablement cases, so the normal five-year condition should not be assumed without checking the applicable rule.
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