Right now, you need 5 years of continuous service to receive gratuity in India. But the Code on Social Security, 2020 — part of the New Labour Codes — changes this for fixed-term contract workers: they become eligible after just 1 year. The law received Presidential assent in September 2020, but most states have not yet notified implementation rules as of July 2026. Here is what the change means, who it applies to, and where things stand right now.
Quick Answer
Quick AnswerWhat are the new gratuity rules under the New Labour Code in India? Under the Code on Social Security, 2020 (part of India's New Labour Codes), fixed-term contract employees will become eligible for gratuity after completing just 1 year of service, compared to 5 years under the current Payment of Gratuity Act. This specifically applies to employees on fixed-term employment contracts, not permanent employees.
The New Labour Codes were passed in 2020 but are not yet implemented. Status as of July 2026: most states have not notified the rules under all four codes. Official source: Ministry of Labour and Employment (labour.gov.in).
Answer Engine Summary
The New Labour Codes (Code on Social Security, 2020) propose reducing the gratuity eligibility threshold for fixed-term contract workers from 5 years to 1 year. For permanent employees, the 5-year rule continues. The codes are yet to be fully implemented across India as of mid-2026. Once implemented, this will significantly benefit short-tenure contract workers in IT, manufacturing, and services sectors.
Last updated: 13 July 2026
Educational information only. Verify applicability with official guidance and qualified professionals where needed.
Current gratuity rules under the Payment of Gratuity Act, 1972
The Payment of Gratuity Act, 1972 currently governs gratuity for establishments with 10 or more employees. Under this law: you must complete 5 years of continuous service to be eligible for gratuity. Gratuity is paid on resignation, retirement, or death/disability.
Gratuity calculation formula: (Last drawn basic salary + DA) × 15/26 × number of years of service. The "15/26" factor represents 15 working days for every 26 working days (one month). Example: Basic salary Rs 50,000, 6 years service → Gratuity = Rs 50,000 × 15/26 × 6 = Rs 1,73,077.
Maximum gratuity: Rs 20 lakh (tax-free). Any amount above Rs 20 lakh is taxable. This limit was last revised from Rs 10 lakh to Rs 20 lakh in 2018.
- Current rule: 5 years continuous service required
- Formula: (Basic + DA) × 15/26 × years of service
- Maximum gratuity: Rs 20 lakh (fully tax-free)
- Applicable to: establishments with 10+ employees
- Official law: Payment of Gratuity Act, 1972
New Labour Code Gratuity — 1 Year vs 5 Year Rule
Who benefits, how it is calculated, and implementation status
What the New Labour Code changes for gratuity
The Code on Social Security, 2020 (one of the four new Labour Codes) proposes two significant gratuity changes: (1) Fixed-term contract employees become eligible for gratuity proportionately after completing 1 year of service (instead of 5 years). (2) The definition of "continuous service" is broadened.
For fixed-term contract workers, the calculation will be pro-rated based on actual service. A fixed-term employee who works for 2 years and 6 months on a Rs 40,000 basic salary would receive: Rs 40,000 × 15/26 × 2.5 = Rs 57,692 in gratuity — under the current law, they would receive Rs 0 (as they did not complete 5 years).
For permanent/regular employees, the 5-year continuous service requirement continues unchanged under the new codes.
Practical Example: New 1-year rule — who benefits and by how much
IT contractor on Rs 60,000 basic salary, 3-year fixed-term contract. Current law: Rs 0 gratuity (< 5 years). New Labour Code: Rs 60,000 × 15/26 × 3 = Rs 1,03,846 in gratuity. Benefit from the change: Rs 1.04 lakh.
When will the New Labour Codes be implemented?
The four Labour Codes — Code on Wages (2019), Industrial Relations Code (2020), Code on Social Security (2020), and Occupational Safety Code (2020) — were passed by Parliament between 2019 and 2020 and received Presidential assent. Implementation requires each state to notify its rules under the codes.
As of July 2026, implementation is partial. Several states have drafted rules, but full national rollout has been delayed. The central government has been in consultation with states and industry bodies. The Ministry of Labour and Employment (labour.gov.in) publishes the latest status of state notifications.
Until the codes are notified and implemented by state governments, the existing laws (including the 5-year gratuity rule under the Payment of Gratuity Act, 1972) continue to apply. Monitor labour.gov.in for the latest updates.
- Labour Codes: passed 2019–2020, implementation pending in most states (as of July 2026)
- State-level notification required for implementation
- Until notified: old Payment of Gratuity Act (5-year rule) applies
- Check: Ministry of Labour & Employment (labour.gov.in) for state-wise status
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.
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Frequently Asked Questions
Can I get gratuity if I resign before 5 years?
Under the current Payment of Gratuity Act, 1972, no gratuity is payable if you resign before completing 5 years of continuous service. The only exception is death or total disablement, for which gratuity is paid regardless of service duration. The New Labour Codes (when implemented) will allow pro-rated gratuity for fixed-term contract workers after 1 year.
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 an employment agreement with a specific end date, as opposed to a permanent open-ended contract. The Code on Social Security, 2020 defines "fixed-term employment" as employment for a fixed period on the basis of a written contract, with the same benefits as permanent workers during the contract period, including EPF and ESI. Under the new codes, these workers get gratuity after 1 year.
Does the New Labour Code affect gratuity for IT companies?
Yes. IT companies (and BPOs, staffing companies) routinely hire on fixed-term contracts. Once the Code on Social Security, 2020 is fully implemented, fixed-term employees at these companies will be eligible for pro-rated gratuity after 1 year. This will increase costs for employers and benefit a large segment of the contract workforce in the IT sector.
Educational Disclaimer
The content on this page is provided for general informational and educational purposes only. It does not constitute financial, tax, legal, or investment advice. Individual situations vary; always consult with a certified tax expert or financial advisor before making major financial decisions.