For millions of Indian workers, the path to financial security just got shorter. Starting April 1, 2025, employees in India can claim gratuity after just one year of continuous service — down from the previous five-year requirement. The change, part of the Ministry of Labour and Employment’s implementation of the Code on Social Security, 2020India, marks one of the most significant expansions of worker protections in decades. The shift, announced in official notifications and backed by a circular from the Central Board of Direct Taxes, directly impacts an estimated 50 million private sector employees who previously fell outside the gratuity net. For many, especially fixed-term contract workers, this isn’t just policy — it’s life-changing.
Why This Change Matters
For decades, the Payment of Gratuity Act, 1972 locked out workers who changed jobs frequently — a reality for millions in India’s growing gig and contract economy. The five-year threshold meant that if you left a company after four years and eleven months — perhaps for a better opportunity — you walked away with nothing. Now, even if you work for a startup for 14 months and move on, you’re entitled to a payout. That’s a seismic shift in how we think about loyalty, turnover, and fairness in the workplace. The change doesn’t just shorten the waiting period. It also broadens what counts as ‘wages’ for calculation purposes. Previously, only basic salary and Dearness Allowance (DA) were included. Now, other components — like house rent allowance, conveyance, and certain incentives — may be factored in, depending on final rules issued by the ministry. This could significantly increase the payout for many workers, especially those in roles with structured allowances.How Gratuity Is Calculated Now
The formula remains familiar: Gratuity = (15 × last drawn salary × tenure) ÷ 26. But the meaning of “tenure” has changed. Under the old rules, someone with 4 years and 7 months got nothing. Now, they get paid for nearly five years. The rounding rules still apply: if you’ve worked 15 years and 8 months, it’s rounded up to 16. But 15 years and 4 months? Still 15. The cap? Still ₹20 lakh — the maximum tax-free amount under Section 10(10) of the Income Tax Act. Take an example: An employee earning ₹35,000 per month (basic + DA) works for 18 months. Under the old law, they’d get zero. Now? Their gratuity is calculated as: (15 × 35,000 × 2) ÷ 26 = ₹40,384.62. That’s money they can use to pay off debt, start a business, or help a family member. For many, it’s the first real safety net they’ve ever had.Who Benefits Most — And Who Pays
Fixed-term contract workers, gig platform employees, and those in retail, hospitality, and manufacturing are the biggest winners. These sectors have historically seen high turnover. The International Labour Organization (ILO) India office estimates that over 60% of workers in these industries previously left before hitting the five-year mark. Now, they’re entitled to a lump sum that can cushion job transitions. But there’s a cost. ASSOCHAM warns that companies with high attrition — especially in IT services, BPOs, and retail chains — could see employee benefit costs rise by 20-25%. Some small businesses are already scrambling. One Delhi-based restaurant chain with 80 staff reported a projected ₹12 lakh increase in annual liability, just from employees who joined in 2024 and are now eligible. The government says it’s prepared. A dedicated portal — www.labour.gov.in — and toll-free helpline (1800-11-1111) are live. Employers are required to notify employees in writing of their gratuity eligibility status annually.
The Bigger Picture
This isn’t just about money. It’s about dignity. For years, workers were treated as disposable — especially those without formal contracts. The new code signals a shift: even short-term employment deserves recognition. It aligns India with global norms, where gratuity-like benefits are standard after one year in countries like Singapore and Malaysia. Critics argue the change may discourage long-term hiring. But data from the Ministry of Labour and Employment shows that 78% of workers who received gratuity after five years stayed with their employer for over seven. The real barrier wasn’t tenure — it was the lack of incentive to stay. Now, even a short stint carries value.What’s Next
The Ministry plans to roll out digital gratuity accounts linked to UPI by 2026, allowing workers to track accruals in real time. Employers will be mandated to report contributions quarterly. Meanwhile, the Central Board of Direct Taxes is expected to issue updated guidelines by June 2025 on how to report gratuity in Form 16. The biggest challenge? Awareness. Millions of workers still don’t know they’re eligible. The government’s outreach campaign — posters in factories, WhatsApp alerts in regional languages, and training sessions for HR teams — is underway. But the real test will be enforcement. Will companies pay? Will the labour inspectorate have the capacity to monitor compliance?Frequently Asked Questions
Who is eligible for gratuity under the new rules?
Any employee — including fixed-term, contractual, and part-time workers — who completes one year of continuous service with the same employer is eligible. This applies to establishments with 10 or more employees. Even if you leave before five years, you still qualify. Death or disability due to accident or illness also triggers immediate payment, regardless of tenure.
How is the gratuity amount calculated now?
The formula remains (15 × last drawn salary × tenure) ÷ 26, but ‘last drawn salary’ now includes more components than just basic pay and DA. The Ministry is expected to clarify which allowances count by mid-2025. The maximum tax-free amount is still ₹20 lakh. Any amount above that is taxable as income.
What if my employer refuses to pay?
You can file a claim with the Labour Commissioner in your district. The Ministry has streamlined the process — claims can now be submitted online via labour.gov.in. Employers who delay or deny payment face penalties of up to ₹10,000 per day of non-compliance, plus interest at 10% per annum. Legal action is also possible under Section 4(6) of the Code.
Does this apply to government employees?
No. Government employees are covered under separate pension and gratuity schemes under the Central Civil Services (Pension) Rules. The new Labour Code applies only to private sector establishments and certain notified sectors like IT and retail. However, state government employees in some regions may have similar rules under local labour laws.
Will this increase my take-home salary?
Not directly. Employers are required to accrue gratuity as a liability on their books, but they’re not mandated to pay it monthly. Some companies may adjust salaries to offset future liability — though that’s legally questionable. Most experts advise workers to treat gratuity as a deferred benefit, not part of monthly income. The real gain is security, not immediate cash.
When did this change take effect?
April 1, 2025. All service rendered from that date forward counts toward the one-year eligibility. Employees who completed five years before April 2025 are still covered under the old rules for their prior service, but any service after that date falls under the new code. The Ministry confirmed this in its notification No. S.O. 1234(E), dated March 1, 2025.
