Understanding the New Gratuity Payment Rules Under India's Labour Code

Original: Gratuity payment: What are the new rules? How is gratuity calculated? Key FAQs answered

Mint•Apr 5, 20263 min

In a Nutshell

The new labour codes in India, effective from April 1, 2023, introduce significant changes to gratuity payments, particularly for fixed-term employees. Gratuity will be applicable from November 21, 2025, and will now include provisions for fixed-term employees after one year of service, calculated on a pro-rata basis.

Key Points

01Gratuity payments will apply from November 21, 2025.
02Fixed-term employees are now eligible for gratuity after one year of service.
03Gratuity is calculated based on the last drawn wages and years of service.
04Employers must pay gratuity within 30 days of it becoming payable.
05Certain components are excluded from the gratuity calculation.

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Full Summary

The new labour codes implemented in India from April 1, 2023, have introduced crucial changes to gratuity payments. Effective from November 21, 2025, the revised rules clarify that fixed-term employees are entitled to gratuity after completing one year of service, calculated on a pro-rata basis. Previously, only non-fixed-term employees were eligible after five years of service. Gratuity is calculated using the formula: last drawn monthly wage × 15/26 × completed years of service. Employers are mandated to disburse gratuity within 30 days from the date it becomes payable. The definition of 'wages' for gratuity calculation now includes basic pay and dearness allowance but excludes components like bonuses and employer contributions to the Employees' Provident Fund. These changes aim to provide better financial security for employees, particularly those on fixed-term contracts.

Key Figures

30 days

Timeframe for employers to pay gratuity after it becomes payable

1 year

Minimum service period for fixed-term employees to be eligible for gratuity

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Why It Matters

These changes enhance financial security for employees, especially those on fixed-term contracts, ensuring they receive gratuity after one year of service.

Who is affected

Fixed-term and non-fixed-term employees in India

What to know

Employees should ensure their contracts are clear on gratuity eligibility and understand the calculation method.

FAQ

Fixed-term employees are now eligible for gratuity after one year of service, calculated on a pro-rata basis.

Gratuity is calculated based on the last drawn wages and years of service using the formula: last drawn monthly wage × 15/26 × completed years of service.

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