Understanding the Change: Gratuity After Just One Year of Service

A major shift has come to India’s labour laws. Under the new labour codes, certain employees—especially fixed-term workers—will now be eligible for gratuity after merely one year of continuous service, instead of the traditional five years. This is a powerful change that could benefit many workers in today’s fast-moving job market.

What Exactly Is Gratuity?

Gratuity is a lump-sum payment that an employer gives to an employee when their job ends. It’s a way to say “thank you” for the service rendered. Under the old rules, an employee had to work for at least five years for the same employer to qualify.

Who Is Covered Under the New Rule?

This change primarily benefits fixed-term employees (FTEs). These are workers hired for a specific duration or tied to a particular project. Under the new labour codes, FTEs get nearly the same benefits as permanent employees: wages, leave, medical cover, and now, gratuity after just one year. 

Why Was This Change Needed?

1. Short Job Tenures Have Become Common Many workers switch jobs often, especially in sectors like IT, retail, start-ups, or gig work. Waiting for five years meant many left before becoming eligible for gratuity. With the one-year rule, even those with shorter stints get some financial recognition.

2. Better Financial Security This reform gives employees a stronger financial cushion if they leave or are let go. For fixed-term workers, this is a big boost in moral and monetary value.

3. More Formal and Fair Hiring By making gratuity accessible earlier, the government hopes to discourage excessive contract staffing and push companies toward more direct hiring.

How Is Gratuity Calculated?

Even with this change, the formula for calculating gratuity remains familiar. It’s usually based on:

• The last drawn salary (basic pay plus dearness allowance)

• A fixed multiplier (often 15/26) times the number of years of service

So, under the new system, after one year, the gratuity payout will reflect that single year (or part of the year, depending on how the law is implemented).

What Else Has Changed in the Definition of “Wages”?

Another important update: the definition of “wages” under the labour code has been expanded. It now includes more components than before—among them, gratuity itself (for calculation purposes) and other allowances. This broader definition ensures that social security benefits are more consistently calculated.

Who Still Needs Five Years — and Who Doesn’t?

• Permanent or regular employees: The five-year rule may still apply for them, depending on how the new labour codes are enforced.

• Fixed-term employees: They are the ones directly benefiting from the one-year eligibility.

In short, this change does not erase all five-year rules, but it creates a special, fairer pathway for contract and project-based workers.

Why This Matters in Real Life

• Young professionals: Many early-career workers change jobs frequently. Getting gratuity after a year means they feel more valued and secure.

• Contract workers: Project-based staff who never stayed long in one place now get a big benefit that was previously out of reach.

• Gig and platform workers: While not all gig workers are fixed-term, this reform is part of a larger push to expand social security to non-traditional workers.

• Employers: Companies may face more frequent gratuity payouts. But they also gain by attracting and retaining talent in a fairer, more transparent way.

Things to Watch Out For

• Implementation details: How exactly this one-year rule will operate will depend on future rules and notifications.

• Accounting for payroll: Employers will need to revise how they budget for gratuity since payouts could happen sooner than before.

• Awareness among workers: Many employees might not yet know about this change. It’s crucial for them to check their employment contract and stay updated with company policy.

• Legal clarity: As the law rolls out, some grey areas may need judicial or regulatory clarification.

In Conclusion

This reform is a significant step forward in modernising labour laws. By allowing fixed-term workers to get gratuity after just one year, the government is acknowledging the changing nature of work and offering more fairness to people in non-permanent roles.

For many workers, this means greater security. For employers, it means more responsibility, but also a chance to build a more stable, engaged workforce. Overall, the change promotes dignity, stability and equality — and that’s a win for both workers and companies.