A one-year gratuity right is available to a specific category: an employee engaged on fixed-term employment who completes one year of service under that contract. It does not reduce the qualifying period to one year for every permanent employee, every person supplied by a contractor, or every gig and platform worker. For most employees, gratuity remains payable after at least five years of continuous service when employment ends because of superannuation, retirement, resignation, or another notified event.
The five-year condition is not required where employment ends because of death, disablement, or expiry of a qualifying fixed-term employment contract.
What changed from 21 November 2025?
The Code on Social Security 2020 came into force as part of the four Labour Codes on 21 November 2025. Section 53 now expressly recognises expiry of a fixed-term employment contract as an event on which gratuity may become payable and provides proportionate treatment for fixed-term employees. The Ministry of Labour and Employment clarified in March 2026 that an FTE qualifies after serving for one year from the start of the contract.
This distinction matters because the phrase “contract employee” is often used loosely. The legal result depends on how the worker is engaged and who the employer is, not merely on whether someone informally calls the role contractual.
Who can receive gratuity after one year?
An employee can use the one-year threshold when the employment is genuinely fixed-term. The person is directly engaged by the employer under a written contract for a fixed period and completes one year of service under that contract. The Central Rules say “at least one year”; the Ministry’s FAQ confirms that exactly one year is sufficient.
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Work arrangement
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Usual qualifying position
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Why
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Fixed-term employee
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One year under the fixed-term contract
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The special FTE rule applies when the written employment contract is for a fixed period.
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Permanent or regular employee
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At least five years of continuous service
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The general Section 53 condition continues, subject to statutory exceptions.
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Worker employed through a contractor
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Generally five years with the contractor
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The Ministry identifies the contractor as employer for gratuity liability. This is not automatically the FTE rule.
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Gig or platform worker
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No automatic one-year gratuity right
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Separate social-security schemes may apply when notified, but that framework does not by itself confer FTE gratuity.
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Employee who dies or becomes disabled
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Five-year minimum not required
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Section 53 removes the five-year condition for death or disablement.
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Employment documents, the real relationship, and applicable Central or State rules can affect a particular case. Employees should keep the appointment letter, extensions, wage slips, attendance record, and separation communication.
Does 1-year mean exactly 12 months?
Yes, for a fixed-term employee, the Ministry’s clarification says eligibility begins after one year from the start of the contract. An 11-month engagement does not meet that threshold. The central rules also address later service periods: after the first eligible year, a subsequent part exceeding six months is rounded to an additional year for the prescribed calculation.
How is gratuity calculated for a monthly-rated employee?
Section 53 generally sets gratuity at 15 days of last-drawn wages for each completed year of service. For a monthly-rated employee, the Code explains the calculation as monthly wages divided by 26 and multiplied by 15. The amount remains subject to the applicable statutory ceiling and any better term available under an award, agreement or employment contract.
Formula: Gratuity = last-drawn monthly wages x 15/26 x eligible years of service
Illustration only: If a qualifying fixed-term employee completes one year and the last-drawn monthly wage for gratuity is Rs 40,000, the indicative amount is Rs 40,000 x 15/26 x 1 = Rs 23,077, rounded to the nearest rupee. Actual payroll components, service records, rounding rules and a better contractual benefit can change the result.
How does the new definition of wages affect gratuity?
Gratuity uses “wages” as defined by the Code, not necessarily the number labelled “basic salary” or the full cost to company. The definition includes specified remuneration and excludes specified items. If excluded components exceed 50% of total remuneration calculated under the Code, the excess is added back to wages for statutory purposes.
That does not mean every employer must simply set basic pay at 50% of CTC, nor does it prove that every employee’s take-home pay will fall. The outcome depends on the salary structure and payroll treatment. Employees should ask payroll for the wage base used in the gratuity calculation rather than assuming that half of CTC is the correct figure.
When does gratuity become payable?
Gratuity may become payable on superannuation, retirement, resignation, death, disablement due to accident or disease, expiry of a fixed-term employment contract, or another event notified by the Central Government. Once it becomes payable, the employer must determine the amount and generally arrange payment within 30 days. Delays may attract interest as provided by law.
How can an eligible employee claim gratuity?
The central rules provide a practical route. An eligible employee should ordinarily apply to the employer in Form IV within 30 days from the date gratuity became payable. The application may be submitted electronically, personally or by registered speed post. A plain-paper application with the necessary details may also be accepted.
- Check whether the appointment letter describes direct fixed-term employment and records a fixed end date.
- Collect the contract, extension letters, wage slips, attendance records, and separation letter.
- Calculate an estimate using the statutory wage base, not automatically CTC.
- Submit Form IV or a complete written application and retain proof of delivery.
- Review the employer’s Form V response, amount, and payment date.
- If eligibility or calculation is disputed, approach the competent authority or obtain advice from a qualified labour-law professional.
A late application is not automatically invalid. The rules require an employer to entertain it where the applicant shows sufficient cause for the delay.
What should employers verify?
Employers should distinguish direct FTEs from workers engaged through contractors, update payroll mapping to the statutory definition of wages, identify qualifying separation events, and maintain nomination and service records. Funding a gratuity liability can support cash-flow planning, but it does not change eligibility or replace the employer’s statutory duties. Any Group Gratuity Insurance arrangement should be assessed on its policy terms, costs, and suitability.
How can ABSLI help employers plan for gratuity liabilities?
Aditya Birla Sun Life Insurance Company Limited may offer group solutions intended to help eligible employers fund employee-benefit liabilities. A funding product does not determine whether gratuity is legally payable and does not alter the amount due under law. Employers should review the applicable product prospectus, policy terms, eligibility, charges, and UIN with an authorised representative before deciding.
What should you remember?
The one-year gratuity rule is narrow but important. It protects qualifying fixed-term employees after one year under their contract. Permanent employees generally remain subject to five years of continuous service, ordinary contract labour is not automatically an FTE, and gig or platform status does not itself create this gratuity entitlement. Verify the written engagement and wage base before calculating or claiming.
September 10, 2026
5 mins read
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