India’s Labour Rules Get Major Makeover as Gratuity Eligibility Cut to One Year

India has introduced a sweeping overhaul of its labour regulations, with one of the most significant reforms being a major reduction in the minimum service required to claim gratuity. Under the new framework, fixed-term employees can now receive gratuity after completing just one year of service, instead of the earlier five-year requirement.

 

The reforms are part of the government’s broader effort to modernise India’s labour ecosystem by consolidating 29 separate laws into four comprehensive Labour Codes. These codes --covering wages, social security, industrial relations, and occupational safety -- aim to simplify compliance, strengthen worker welfare, and support faster, clearer decision-making for businesses.

 

Authorities say the updates were necessary to address long-standing challenges, including outdated colonial-era regulations, overlapping enforcement mechanisms, and a rapidly evolving economic and technological landscape.

 

A key highlight is the revamped gratuity rule. Previously, eligibility under the Payment of Gratuity Act required five continuous years of service. The new codes allow Fixed Term Employees to qualify after one year, putting them on par with permanent staff in terms of access to leave benefits, medical cover, social security, and salary structures. The move is expected to reduce dependence on contract labour and promote more transparent, direct hiring practices.

 

The updated framework is designed to benefit a wider segment of the workforce, including fixed-term workers, informal sector employees, gig and platform workers, migrant labourers, and women employees. With the broader wage definition now in place, gratuity payouts may rise, prompting employers to review their contracts, classifications and payroll systems.

 

Gratuity -- typically paid when an employee resigns, retires or leaves the organization -- remains a key financial safeguard for long-term service. The revised eligibility rule makes it more accessible than ever, particularly for short-tenure workers.

The standard calculation continues to follow the formula:
Gratuity = Last drawn salary × (15/26) × years of service,
where last drawn salary refers to basic pay plus dearness allowance.

 

The gratuity reform forms part of a wider labour transformation. Other notable changes under the codes include longer permissible work shifts, approval for night work for women, updated recognition for gig and platform workers, and raised thresholds for employer permissions on layoffs -- from 100 to 300 workers.

 

According to the government, the new codes aim to balance improved welfare and protection for workers with greater operational flexibility for employers, ultimately supporting productivity, growth and ease of doing business.

 

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