Gratuity for Fixed-Term Employees — the New 1-Year Rule
Fixed-term and contract employees become eligible for gratuity after just 1 year of continuous service under the Code on Social Security — a sharp reduction from the 5 years required for permanent employees.
The four Labour Codes came into force on 21 November 2025. Central rules are still being finalised and state rules vary — some states have notified final rules, others remain in draft. Verify the position for your state before relying on these figures.
Fixed-term gratuity vests after 1 year under the Code on Social Security, not 5.
HRA, conveyance, special allowance, overtime, etc. — needed to compute the Codes' expanded wage base.
Non-covered establishments use 15/30, not 15/26.
Years of service
7y 1m
Qualifying years
7
Final year had ≤6 months, not rounded up
Required service
1 year
Formula: Statutory wages × 15/26 × qualifying years
Calculated gratuity (uncapped)
₹2,01,923
Ceiling limit
₹20,00,000
Payable amount₹2,01,923
Tax treatment (Section 10(10))
Tax-exempt amount: ₹2,01,923
Taxable amount: ₹0
TDS applicable: No
Why this amount — the wage base matters
On the OLD basic-only base (₹50,000/month), this gratuity would have been ₹2,01,923.
This employee's excluded allowances were already within the 50% cap, so the wage base is unchanged from basic-only — no add-back applies here.
Fixed-term gratuity vesting after 1 year is a genuine change under the Code on Social Security — confirm with a CA/CS whether pro-rata applies for this specific case before relying on this figure. Build the full salary structure →
What changed, specifically
Before the Labour Codes, the Payment of Gratuity Act's 5-year continuous-service requirement applied uniformly, regardless of whether an employee was on a permanent or fixed-term contract — in practice this meant most fixed-term and contract employees, who rarely stayed anywhere near 5 years, never qualified for gratuity at all. The Code on Social Security, 2020 changes this specifically for fixed-term employment: the qualifying period drops to 1 year of continuous service.
This is a meaningful shift for industries that rely heavily on fixed-term hiring — IT services, BPO, retail, and manufacturing with seasonal or project-based staffing all commonly use fixed-term contracts. Employers in these sectors need to budget for gratuity liability on a workforce segment that was largely exempt from it before.
What's still unconfirmed — verify before advising a client
Whether the 1-year gratuity payable to a fixed-term employee is pro-rated for partial years beyond the first, or computed identically to the standard 15/26 formula once the 1-year threshold is crossed, is a detail that needs direct confirmation against the finalised central rules (still in draft as of the last check, with finalisation expected around 1 April 2026) or the specific state rules that apply to your client's establishment.
How this interacts with the wage base change
A fixed-term employee's gratuity is computed on the same expanded statutory wage base as a permanent employee's — meaning both the eligibility threshold (1 year instead of 5) AND the wage base (potentially higher than basic pay alone) work in the fixed-term employee's favour compared to the pre-Codes position, where they likely got nothing at all.
Frequently asked questions
Related pages
Why this matters
Gratuity disputes come down to two numbers — years of service and the wage base — and getting either wrong for one exiting employee is a liability. PracticeFlow keeps the calculation consistent across every client.
Related tools
Managing full-and-final settlements for 60 clients? PracticeFlow tracks exit dates, gratuity eligibility and settlement deadlines for every employee, across every client, in one place.
See PracticeFlow for CA FirmsEstimate for planning purposes, not legal or tax advice — always confirm with a CA/CS before finalising a settlement.