India’s new labour laws explained: Gratuity after 1 year, wages revised
India’s labour overhaul lets fixed-term employees claim gratuity after 1 year, not 5
India has rolled out a major overhaul of labour rules — and one of the biggest changes is a sharp cut in the minimum service required to claim gratuity.
Labour reforms are ongoing, with the government modernising and streamlining legislation to match the evolving economic and industrial landscape. The codification of 29 existing labour laws into four Labour Codes aims to tackle long-standing challenges, simplify compliance, and make the system more efficient.
It also seeks to boost ease of doing business, promote employment generation, and ensure safety, health, social, and wage security for all workers.
Why are labour laws being updated?
Simplifying compliance: Multiple laws previously made compliance complex.
Streamlining enforcement: Various authorities overseeing different laws caused confusion.
Modernising outdated laws: Many labour laws were drafted pre-Independence and required alignment with today’s economic realities and technology.
What has changed in gratuity rules?
Under the previous Payment of Gratuity Act, employees were eligible for gratuity only after completing five continuous years with an organisation.
With the new labour codes, Fixed Term Employees (FTEs) can now claim gratuity after just one year of service. The government says this aligns FTEs with permanent staff, offering equal access to salary structures, leave, medical benefits, and social security.
Who benefits from the new rule?
The revised framework covers:
Fixed-term employees
Informal sector workers
Gig and platform workers
Migrant labourers
Women employees
The reform is expected to reduce over-reliance on contract staffing and encourage more transparent, direct hiring.
Why does this matter?
Previously, fixed-term staff leaving before five years missed out on gratuity. The one-year benchmark allows more employees to qualify.
The broader wage definition may also increase gratuity payouts, benefiting employees financially. Employers will need to update payroll and HR policies and reassess gratuity liabilities.
Tip: Fixed-term employees should check eligibility, while employers should review contracts, classifications, and payroll calculations.
What is gratuity?
Gratuity is a lump-sum financial benefit paid by an employer as a token of appreciation for long-term service. It is usually awarded when an employee resigns, retires, or leaves the organisation.
One-year eligibility now makes gratuity far more accessible, especially for short-term contract employees.
How is gratuity calculated?
Formula:
Gratuity = Last drawn salary × (15/26) × Number of years of service
Last drawn salary includes Basic Pay + Dearness Allowance
Example:
If an employee earns ₹50,000 (basic + DA) and works five years:
50,000 × (15/26) × 5 = ₹1,44,230
How does this fit into wider labour reforms?
The gratuity change is part of India’s new labour framework, consolidating 29 laws into four codes covering wages, industrial relations, social security, and occupational safety.
Other key changes include:
Allowing longer shifts
Permitting night work for women
Redefining gig and platform work
Raising layoff approval thresholds from 100 to 300 workers
The government says the new codes aim to improve worker welfare while giving businesses more flexibility in hiring and operations.
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