New Delhi: Employees will now be eligible to receive gratuity after completing just one year of service instead of the earlier mandatory five-year requirement, the government has announced while overhauling India’s labour laws.
The Centre, on Friday, brought into place four simplified labour codes, merging 29 legislations that existed.
Union labour minister Mansukh Mandaviya has said that the restructuring aims to provide better wages, wider social security, improved working conditions and stronger health-related safeguards for workers across all sectors.
The reforms concern fixed-term employees (FTEs), who would be eligible for gratuity after completing only one year of service with an organisation. This marks a significant departure from the previous provision under the Payment of Gratuity Act, which mandated a minimum of five continuous years of service for eligibility.
An FTE is one hired under a contract with a predetermined end date or tied to the completion of a specific task or project. The labour ministry clarified that the reform is intended to ensure parity between fixed-term and permanent employees. With this change, fixed-term workers will now receive the same salary structure, leave facilities, medical benefits and social security protections as regular staff.
Th
e government believes that reducing the gratuity tenure will discourage the widespread dependence on contract staffing and promote more structured, direct hiring by employers.
It was speculated earlier that the eligibility period might be reduced to three years. However, the final decision to bring it down to just one year for fixed-term employees represents a far more transformative step.
Gratuity is a lump-sum financial benefit paid by an employer to an employee as a token of appreciation for long-term service. Traditionally, this payment was made upon resignation, retirement or separation from an organisation after completing the mandatory five-year service period.
FTEs with two or three-year contracts were not eligible for this. Now, this payout will offer a crucial financial cushion during transitions.
The Payment of Gratuity Act covers a wide range of establishments, including factories, mines, oil fields, ports and railways.
The gratuity amount is determined using a standard formula: Last Drawn Salary × (15/26) × Number of Years of Service.
The last drawn salary includes Basic Pay and Dearness Allowance.
If an employee served for a year with a final basic-plus-DA salary of Rs 50,000, his gratuity would be: 50,000 × (15/26) × 1 = Rs 28,846.
This would ensure some financial support till the employee gets engaged elsewhere. The new framework is expected to offer greater financial security to employees while encouraging more stable workforce practices among employers.
According to the government, the new labour codes mark a significant step toward aligning India’s labour ecosystem with global standards and supporting a more equitable work environment.