Fixed-Term Employee? Your Gratuity Now Starts at 1 Year, Not 5

What changed?

Before the Labour Codes, gratuity was governed by the Payment of Gratuity Act, 1972, which generally required five years of continuous service. That Act was among the twenty-nine central laws replaced when the four Labour Codes came into force on 21 November 2025. Gratuity is now dealt with in the Code on Social Security, 2020.

The reasoning behind the change is straightforward. Fixed-term employment by its nature often runs for less than five years, so a five-year threshold meant fixed-term staff structurally could not accrue a benefit that permanent staff could. The Codes treat fixed-term employment as a recognised category with parity of benefits, and reducing the qualifying period addresses that gap.

For an employee on a two- or three-year fixed-term contract, this is not a technicality. It can mean tens of thousands of rupees at the end of each term that a five-year reading would have denied, and over a career spent on project contracts the total can be significant.

Where does the one-year rule come from?

It comes from two provisions read together. Section 2(o) of the Industrial Relations Code, 2020 defines fixed-term employment. Among other things, it provides that a fixed-term employee's hours, wages, allowances and other benefits must not be less than those of a permanent worker doing the same or similar work, that the employee is eligible for statutory benefits proportionate to the period of service, and that the employee becomes eligible for gratuity on rendering service under the contract for one year.

Section 53 of the Code on Social Security, 2020 is the main gratuity provision. It keeps the general five-year rule but provides that five years of continuous service is not necessary where employment ends on death or disablement or on expiry of fixed-term employment, and it provides for gratuity to fixed-term employees on a pro-rata basis.

Commentators have pointed out that the two Codes are not perfectly aligned: one speaks of eligibility after a year, the other of removing the five-year condition on expiry of the term. In practice most employers and advisers read them together as giving fixed-term employees gratuity after one year, calculated pro rata. Where a case turns on the gap between the two, for example a fixed-term employee who resigns before the term ends, take advice.

How is fixed-term gratuity calculated?

Gratuity is calculated at fifteen days' wages for each completed year of service, based on the wages last drawn. For monthly-paid employees the conventional formula is last drawn monthly wages, multiplied by 15, divided by 26, multiplied by the number of years. The figure is subject to a ceiling notified by the Central Government.

Take Sneha, on a two-year fixed-term contract in Chennai with last drawn wages of ₹52,000 a month. When her term expires, gratuity under the formula is ₹52,000 × 15 ÷ 26 × 2, which is ₹60,000. If her contract had been for one year, it would be ₹30,000. Under the old five-year reading she would have received nothing in either case.

Two details deserve care. First, 'wages' now has the uniform meaning in the Codes, so if Sneha's basic pay is low and her excluded allowances exceed half of her remuneration, part of those allowances is added back and her gratuity rises. Second, how a part-year is treated for a fixed-term employee, for example a term of 18 months, depends on the pro-rata wording in the Code and the applicable rules, so check how your employer is applying it rather than assuming either rounding up or rounding down.

Which wages are used, and why it can change your number

Gratuity is calculated on 'wages', and the Codes now use a uniform definition. Wages include basic pay, dearness allowance and retaining allowance, and exclude listed items such as house rent allowance, conveyance and overtime. If the excluded items together exceed half of total remuneration, the excess is treated as wages.

Here is how that plays out. Imran is on a one-year fixed-term contract in Bengaluru. His monthly remuneration is ₹80,000: basic pay of ₹24,000 and ₹56,000 in excluded allowances. Half of his remuneration is ₹40,000, so ₹16,000 of the allowances is added back and his wages for gratuity become ₹40,000. One year's gratuity is then about ₹23,077 instead of about ₹13,846 on basic pay alone.

If your employer's calculation uses basic pay only, ask how the wage definition has been applied. Some allowances in Indian salary structures, such as a 'special allowance', may not fall within the listed exclusions at all, and advisers differ on how they should be treated. The difference over several fixed terms can be meaningful.

Fixed-term and permanent employees compared

Why does my contract still say five years?

Employment templates in India commonly carry a line to the effect that gratuity is payable in accordance with the Payment of Gratuity Act, 1972 on completion of five years of continuous service. That sentence was accurate for decades, which is exactly why it is everywhere.

Applied to a fixed-term employee today it is not. A contract term cannot take away a statutory entitlement, so a five-year sentence in a fixed-term contract does not stop you claiming gratuity after one year. But it is a clear sign that the template predates the Codes, and it is worth flagging whether you are issuing the contract or signing it. Sample wording to ask for: 'You will be entitled to gratuity on a pro-rata basis on completion of one year of service under this fixed-term contract, in accordance with the Code on Social Security, 2020.'

Renewed contracts and the fixed-term label

The change raises the stakes on how an engagement is characterised. An engagement labelled fixed-term but operating like permanent employment, or a chain of back-to-back one-year contracts doing the same job, was always worth examining. It is now worth examining for a further reason, because the label decides which gratuity rule applies.

If you have been on renewed fixed-term contracts, consider whether each term was a genuinely separate engagement and whether your service was continuous. Keep every contract, renewal letter and payslip. Whether service before 21 November 2025 counts towards the one-year threshold has also been discussed by advisers, and the answer may depend on the facts and on how the transition is treated. This is a good question for an advocate with your actual documents in hand.

What if you are called a consultant but work like an employee?

Some organisations engage people on 'consultancy' or 'retainership' agreements for roles that look exactly like employment: fixed hours, a manager, a company email address, leave approvals and no other clients. Calling the arrangement consultancy does not decide the question. Courts and authorities look at the substance of the relationship, including control over how the work is done and integration into the business.

If the substance is employment, the person may be a fixed-term or permanent employee for the purposes of the Codes, with gratuity and other benefits following. If you are in that position, keep evidence of how the work is actually done, such as attendance records, reporting lines and leave approvals. For employers, the safer course is to use a fixed-term contract that complies with Section 2(o) rather than a consultancy label that may not hold.

How do you claim it?

• Check your final payslip and full and final settlement statement for a gratuity line, and the wage figure used.
• If it is missing or too low, write to HR citing Section 53 of the Code on Social Security, 2020 and your fixed-term contract dates.
• Ask for the calculation in writing, including the wage base and how any part-year was treated.
• Keep the email trail. If the employer does not pay, the Code provides a mechanism before the authority appointed by the appropriate Government, and State rules set out the forms and time limits.
• Take advice early if the amount is significant or the employer disputes that you were fixed-term at all.

What employers should check

• Whether every fixed-term contract states the one-year gratuity position correctly, and none refers to the Payment of Gratuity Act, 1972.
• Whether payroll and provisioning reflect the one-year threshold and the wage base under the uniform definition.
• Whether fixed-term staff receive the same wages and benefits as comparable permanent staff, as Section 2(o) requires.
• Whether repeated renewals for the same role are creating a characterisation risk.
• Whether the State where each employee works has final rules setting the forms and procedures for payment and claims.