How the New Labour Codes Redefine Gratuity for India’s Workforce

Central Government has announced the operationalization of the four comprehensive Labour Codes, consolidating 29 complex labour laws.

Among the most significant reforms impacting millions of workers is the dramatic reduction in the mandatory service period for gratuity eligibility: from the existing five years to just one year of continuous service under the new Code on Social Security, 2020.

A Game-Changer for the Fixed-Term Workforce

The pivotal change specifically benefits Fixed-Term Employees (FTEs), a rapidly growing segment of the Indian workforce engaged in time-bound contracts across sectors like IT, manufacturing, media, and startups.

Previously, FTEs were often disqualified from gratuity benefits upon the expiration of their contracts, as they seldom met the five-year continuous service benchmark set by the erstwhile Payment of Gratuity Act.

Under the new provision (Section 53 of the Code on Social Security), an FTE is now entitled to gratuity on a proportionate basis upon the expiration of their contract, provided they have completed not less than one year of continuous service, generally counted as 240 working days in a year.

This change ensures that workers in project-driven or flexible roles no longer forfeit a key financial cushion simply due to the nature of their employment contract.

While the standard five-year threshold for permanent employees generally remains, the provision for FTEs marks a huge step towards inclusivity.

Labour Codes: Bringing Parity and Enhanced Protection

The move is part of a broader push to bring Fixed-Term Employees at par with their permanent counterparts.

The new codes mandate that FTEs must receive the same benefits as permanent workers, including equivalent wages, medical coverage, earned leave entitlements, and other social security benefits.

Industry experts describe the move as a long-awaited structural reset, creating a more inclusive and future-ready labour ecosystem.

Furthermore, the new regime introduces a uniform definition of “wages” across all four Labour Codes.

This standardized definition ensures that certain allowances (like conveyance or house rent allowance) are capped, compelling employers to maintain a higher basic pay component—typically set at 50% of the Cost-to-Company (CTC).

Because employers calculate gratuity based on basic pay, this standardized wage structure should lead to higher overall gratuity payouts for employees, reinforcing their long-term retirement security.

The tax-free limit for gratuity payments remains retained at ₹20 lakh.

The reforms also extend the social security net for the first time to gig and platform workers, requiring aggregators like ride-hailing and delivery services to contribute to a dedicated social security fund.

By simplifying compliance and extending benefits to an estimated 400 million workers across the formal and informal sectors, the government aims to promote formalisation, reduce contractualisation, and place the Indian workforce on a much stronger, more secure footing.

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