India's gratuity rules now give fixed term employees a specific route to gratuity after at least one year under their contract. The same one-year rule does not automatically apply to ordinary contract labour, consultants, freelancers, gig workers, or platform workers. Your employment category, employer, and applicable rules determine the result.
What changed in the gratuity rules for 2026?
The four central labour codes became effective on 21 November 2025. Under Section 53 of the Code on Social Security 2020, the usual five year condition is waived when fixed term employment ends. The final central rules require at least one year under the fixed term contract and prescribe how a later fraction of service is counted. This change is narrower than many summaries suggest.
A person hired for a defined period directly as a fixed term employee is not the same as a worker supplied by a contractor, an independent consultant, or a platform worker. The label in an agreement matters, but the actual legal relationship and the applicable central or state rules also matter.
Who is eligible for gratuity after 1 year?
A fixed-term employee can qualify after completing at least one year under the contract when that fixed-term expires. Under the final central rules, a later period of six months or more is rounded to one additional year. This special threshold does not reduce the general five year threshold for permanent employees or ordinary contract labour.
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Worker category
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Usual 2026 position
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What to verify
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Fixed term employee
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Eligible on expiry of the fixed term after at least one year, subject to applicable rules.
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Written employment contract, employing entity, contract dates, and wage records.
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Permanent employee
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Generally eligible after five years of continuous service. Five years is not required where termination is due to death, disablement, or another notified event.
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Continuous service, reason for termination, and any better contractual terms.
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Contract labour
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The contractor generally bears gratuity liability after five years of continuous service under the Ministry FAQ.
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Identity of contractors, continuity across contracts, and employment records.
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Consultant or freelancer
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No automatic employee gratuity right merely because a services contract exists.
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Whether the relationship is legally one of employment. Obtain advice for disputed classification.
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Gig or platform worker
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No general statutory gratuity entitlement solely from gig or platform status.
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Any notified scheme, eligibility conditions, and registration requirements.
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How is gratuity calculated in 2026?
For a monthly rated employee, Section 53 uses 15 days of last drawn wages for each completed year of service or qualifying part. The formula is last drawn monthly wages divided by 26, multiplied by 15, multiplied by the counted years. Fixed-term employees and deceased employees receive gratuity on a pro rata basis, subject to the applicable rules.
Monthly gratuity = Last drawn monthly wages × 15 ÷ 26 × counted years
Example: Assume last drawn monthly wages of ₹40,000 and three completed years of service. The calculation is ₹40,000 × 15 ÷ 26 × 3 = ₹69,230.77, or approximately ₹69,231. This is an illustration, not a statement of entitlement. Payroll must first identify the correct statutory wage base and counted service.
Do not simply assume that wages equal 50% of cost to company. Under the code, wages include basic pay, dearness allowance, and retaining allowance, if any. If specified excluded components exceed 50% of total remuneration, or another notified percentage, the excess is added back for the statutory calculation.
How is an 18-month fixed-term contract counted?
For establishments governed by the final central rules, a fixed-term employee who completes at least one year and then serves a further six months or more has that later period rounded to an additional year. An 18-month contract may therefore be counted as two years for this purpose. State rules or case specific facts may require separate review.
Using ₹40,000 as the last drawn monthly wages, the illustrative amount for two counted years is ₹40,000 × 15 ÷ 26 × 2 = approximately ₹46,154. The contract must genuinely fall within fixed-term employment, and eligibility normally arises when the fixed term expires.
Who pays gratuity for a contract worker?
For ordinary contract labour, the Ministry of Labour and Employment FAQ dated 16 March 2026 identifies the contractor as the employer responsible for gratuity after five years of continuous service. The one-year fixed-term rule should not be applied merely because a worker has a time limited deployment at a principal employer's site. The principal employer has separate responsibilities under labour law, but that does not by itself transfer every gratuity obligation from the contractor.
Workers should retain appointment letters, contractor details, wage slips, attendance records, and renewal documents. Employers should map each worker to the correct employing entity before calculating liability.
Do gig and platform workers receive gratuity?
Gig and platform workers are recognised under the Code on Social Security 2020, and the Central Government may frame welfare schemes for them. However, the code does not grant every gig or platform worker the employee gratuity described in Section 53 merely because the person works through an aggregator. Aggregators may be required to contribute between 1% to 2% of annual turnover, subject to a cap of 5% of the amount paid or payable to gig and platform workers.
That contribution supports notified social security schemes. It should not be described as a personal gratuity account or an automatic gratuity payout.
When must the employer pay gratuity?
The employer must determine the gratuity amount when it becomes payable and pay it within 30 days. If payment is delayed, simple interest may apply unless the delay resulted from the employee's fault and the employer obtained written permission from the competent authority for delayed payment on that ground. The two working day timeline sometimes cited after resignation or termination belongs to final wage payment under the Code on Wages 2019.
It is not the gratuity payment deadline. Keeping these timelines separate prevents employees and payroll teams from relying on the wrong remedy.
What should an employee do to claim gratuity?
An eligible employee should normally apply to the employer in Form IV within 30 days after gratuity becomes payable. A delayed application can still be considered when sufficient cause is shown, and a claim does not become invalid solely because the application was filed late. Keep proof of submission and all supporting records.
- Check the appointment letter and identify whether the employer is the establishment or a contractor.
- Confirm the employment category, start date, end date, reason for termination, and continuous service record.
- Review the last drawn wage components used for the calculation.
- Submit Form IV electronically, personally, or by registered speed post, as permitted by the applicable rules.
- If the employer disputes eligibility or the amount, approach the competent authority or the Ministry's SAMADHAN channel and obtain legal advice where classification is contested.
What should employers review in 2026?
Employers should separate fixed term employment, direct permanent employment, and contract labour in workforce records. Each category can create a different threshold and responsible entity. Gratuity provisioning should use the statutory wage definition, current service data, and the payment timeline rather than a flat percentage of cost to company.
- Update employment templates so the employing entity and fixed term, if any, are clear.
- Reconcile contractor records with attendance, wage, and continuity data.
- Obtain an actuarial valuation where required and maintain sufficient funding for expected liabilities.
- Create a documented workflow for nomination, Form IV applications, notices, payment, and disputes.
- Have legal and payroll teams review central and applicable state rules before applying rounding or classification decisions.
How can ABSLI support retirement planning after gratuity?
A gratuity payment can form one part of a broader retirement plan. ABSLI provides educational resources, calculators, and access to authorised representatives who can explain Life Insurance and annuity options. Any purchase decision should follow a needs assessment and a review of the applicable product brochure, benefits, exclusions, charges, and terms.
September 16, 2026
5 mins read
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