Gratuity Eligibility Reduced To One Year From Five In New Labour Rules

The Union government has announced changes to India's labour laws, reducing the minimum service requirement for fixed-term employees to receive gratuity from five years to one year. 

The move forms part of a wider overhaul unveiled on Friday, November 21, which rationalizes 29 existing labour laws into four labour codes.

Eased Gratuity Norms

Among the most significant changes is the easing of gratuity eligibility, a shift expected to reach a large and diverse workforce. Under earlier rules set by the Payment of Gratuity Act, fixed-term employees qualified for the benefit only after five years of continuous employment. 

The new codes relax this requirement, allowing fixed-term employees (FTEs) to access gratuity after completing a single year of service.

Here, the intention is to ensure parity between fixed-term and regular staff. The updated provisions guarantee FTEs the same salary structure, leave entitlements, medical benefits and social security coverage as permanent workers. 

The government believes this alignment “promotes direct hiring and reduces excessive contractualisation,” the centre said in a statement.

Fixed-term employees are hired for a set period or for a specific project. The new rules aim to treat them more like permanent staff. The changes also cover informal, gig, platform workers, migrant labourers and women employees.

Understanding Gratuity

Gratuity is a lump-sum financial payout employers make to workers as a gesture of appreciation for extended service. Traditionally, employees received it upon resignation, retirement or another form of separation after fulfilling the mandatory five-year period. 

With the reworked rules, fixed-term staff will no longer have to wait that long. The government expects the shorter eligibility window to give employees stronger financial stability, particularly during job changes.

New Labour Codes Replace Outdated Laws

India's patchwork of labour rules dates back to the pre-Independence and early post-Independence decades, when economic conditions were vastly different. 

While many nations have modernised and merged their labour laws over the years, India continued to rely on a mix of fragmented and sometimes outdated legislation spread across 29 Central Acts. This created compliance challenges for employers and uncertainty for workers.

The introduction of the four Labour Codes will replace these older structures with a more coherent system. The intention is to support both employees and businesses, enabling a workforce that is more secure, productive and aligned with global standards.