If you’ve been scrolling through HR updates lately, you’ve probably noticed one topic creating a lot of buzz the new gratuity rules under the Labour Codes. And there’s one question almost everyone is asking: “Are permanent employees now eligible for gratuity after just 1 year of service?”
Honestly, the confusion makes sense. The new rules give a big advantage to fixed-term and contract workers, and that has many full-time employees wondering if the same relaxation applies to them too. Let’s break it down in the simplest and most human way possible, without legal jargon or robotic sounding explanations.
So who actually gets gratuity after 1 year of service?
Under the Code on Social Security, 2020, the one-year eligibility applies only to:
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- Fixed-Term Employees (FTEs)
- Contract workers
They can qualify for gratuity after completing just 1 year of continuous service, instead of the earlier 5-year requirement. For thousands of workers who function on short contracts and project-based roles, this change is a game-changer.
But here’s the thing many people miss — this rule doesn’t apply to everyone.
Are permanent employees also eligible for gratuity after 1 year of service under new labour codes?
Short answer: No.
Permanent employees are still required to complete 5 years of continuous service to become eligible for gratuity benefits. The new Labour Codes did not change this condition for full-time employees.
The only exceptions for permanent employees to receive gratuity before 5 years are:
- Death while in service
- Permanent disability
So if you’re a full-time employee, the earlier 5-year rule is still in place.
Quick comparison: who gets gratuity after 1 year vs. 5 years
| Type of Employment | Gratuity Eligibility | Minimum Service Required |
|---|---|---|
| Fixed-Term Employees (FTEs) | Yes | 1 year |
| Contract Workers | Yes | 1 year |
| Permanent Employees | No | 5 years (unless death/disability) |
This table alone clears 90% of the confusion.
What is gratuity and why does it matter?
Think of gratuity as a “thank you” from your employer for staying loyal to the organisation. It’s not a random bonus. It’s a legal benefit under the Payment of Gratuity Act, 1972, paid when an employee resigns, retires, or separates from service.
For employees, it works as a safety cushion for the next phase of life. And from the employer’s side, it’s a way to reward long-term commitment.
What do the new labour codes say about gratuity?
The Labour Codes aim for fairer compensation. According to a government press note, basic pay + dearness allowance + retaining allowance must make up at least 50% of total wages. If allowances exceed 50%, the excess gets added back to wages.
Why is this important?
Because gratuity (and contributions like PF and maternity benefits) are calculated on wages. So with a larger wage portion defined, employees can expect higher future gratuity amounts.
How is gratuity calculated?
The formula stays the same under the Act:
Gratuity = (Last drawn monthly wage × 15 ÷ 26) × Years of service
To make it simpler:
- 15 represents 15 days’ salary
- 26 represents working days in a month
Even one extra completed year makes a difference in the final payout.
Is gratuity part of CTC?
Yes. Employers include gratuity in the Cost to Company (CTC) because it’s a financial cost they must eventually pay for eligible employees. It’s not an instant benefit, but it’s still a future obligation — so companies factor it into total compensation.
Why these new gratuity rules matter
Whether you’re a contract worker or a full-time employee, knowing where you stand prevents misunderstandings later. And if you’re someone hopping between short-term roles or project-based jobs, the updated rule is genuinely empowering — you finally receive a benefit that was once reserved for long-tenured employees.
For permanent employees, although the 1-year rule doesn’t apply, higher wage definitions under the labour code can result in a better gratuity amount over the long run.
Frequently Asked Questions
1. Will permanent employees eventually get gratuity eligibility after 1 year in the future?
There’s no official indication of such a change. The government has deliberately designed the 1-year rule for fixed-term and contract workers who generally do not stay long enough to complete five years.
2. Does a break in service reset the 5-year requirement for permanent employees?
A break doesn’t always reset the requirement. If the break follows specific permitted conditions (like maternity leave, accident leave, or layoff), it still counts as continuous service under the Act.
3. Is gratuity taxable?
For non-government employees, gratuity is tax-exempt up to the notified limit under Section 10(10) of the Income Tax Act. Any amount exceeding that threshold becomes taxable.
