Gratuity in India now reaches fixed-term staff after one year, so budget for it early
Gratuity in India is a lump-sum payment you owe an employee for continuous service, and since 21 November 2025 it reaches fixed-term staff after one year instead of five. The formula itself hasn’t moved. But the wage it runs on has grown, so the bill is bigger than most offer letters assume.
We run India payroll for global teams every month, and gratuity is the line item that surprises finance leads most. It sits quietly on the balance sheet for years, then lands as a cheque when someone leaves. If you hire through a fixed-term contract, that timeline just shrank dramatically.
Gratuity in India changed on 21 November 2025, and fixed-term hires felt it first
The government brought the four labour codes into force on 21 November 2025, and the Code on Social Security, 2020 now governs gratuity. The Press Information Bureau’s announcement lists “gratuity eligibility after just one year, instead of five” for fixed-term employees (PIB release on the labour codes).
That single line changes how you should price short contracts. A twelve-month project hire used to leave without any gratuity claim. Now that person has one.
Rules and clarifications have kept arriving since the codes took effect, so check the current position with counsel before you finalise contract templates. Our overview of how the new labour codes affect employers tracks the wider picture.
Who qualifies for gratuity in India depends on the contract type
Permanent employees still need five years of continuous service, except where service ends through death or disablement. Fixed-term employees now qualify after one year of service under their contract, as the Cyril Amarchand Mangaldas guide to the labour codes explains (Guide to the Labour Codes).
| Employee type | Service needed | What it means for you |
| Permanent | 5 years of continuous service | Accrue every month; the payout arrives at exit or retirement |
| Permanent, death or disablement | No minimum | Payable whatever the length of service |
| Fixed-term | 1 year under the contract | Budget it into any contract of twelve months or longer |
| Fixed-term, under 1 year | Not yet eligible | Watch renewals, because service can build across them |
Meanwhile, the government’s own summary says fixed-term employees should receive benefits equal to permanent workers, including leave, medical cover and social security. Treat their offer letters accordingly.
Contractors aren’t automatically outside the net
If someone works like an employee, labelling them a contractor won’t remove the obligation. Regulators look at control, hours and integration, not only the title on the paper. Our guide to statutory benefits in India shows how that exposure builds.
The gratuity formula is simple, and the wage base is where the money moves
Gratuity equals last drawn wages, multiplied by 15, multiplied by completed years of service, divided by 26. A part year of more than six months rounds up to a full year, according to Fisher Phillips’ review of the new gratuity rules (Fisher Phillips analysis).
The statutory ceiling is currently ₹20 lakh. The Cyril Amarchand Mangaldas guide notes it continues until the Central Government changes it.
Here’s an illustrative comparison. The figures are our own arithmetic on the standard formula, not a quote from any employer.
| Monthly wage base | Gratuity per year of service | After 1 year (fixed-term) | After 5 years | After 10 years |
| ₹30,000 | ₹17,308 | ₹17,308 | ₹86,538 | ₹173,077 |
| ₹50,000 | ₹28,846 | ₹28,846 | ₹144,231 | ₹288,462 |
Same job, same total pay package, and a gap of roughly ₹57,700 after five years. The only variable is how much of the package counts as wages.
Why gratuity in India costs more once allowances hit the 50% line
The new definition of wages caps how much of a package can sit in exclusions. If exclusions such as house rent allowance, conveyance and overtime exceed 50% of total remuneration, the excess gets added back into wages. The Cyril Amarchand Mangaldas guide sets this out, and Fisher Phillips reads it the same way.
In practice, a structure with a thin basic and a heavy special allowance no longer keeps gratuity low. Provident fund calculations move with the same definition. We’ve broken down the take-home effect in our piece on the 50% basic wage rule.
One caution. How specific allowances are treated, special allowances in particular, is where advisers still read the provisions differently. Your own position should come from your counsel, not from a blog post, including this one.
What a sensible accrual looks like
Take 15/26 of one month’s wages, then divide by twelve, and book that amount every month on the wider wage base. On the ₹50,000 example, that’s about ₹2,404 a month. Set it aside from the first month, not the first claim.
Pricing a twelve-month fixed-term hire
Consider an illustrative project engineer on a twelve-month contract with a ₹50,000 wage base. Gratuity for that single year comes to ₹28,846, which is just under 5% of the year’s wages. It’s small for one person, but it multiplies fast across a ten-person squad.
By contrast, a contract of eleven months may fall short of the one-year threshold. Don’t engineer contract lengths around that, though. Splitting service to dodge a statutory benefit invites disputes and reputational damage. Price the benefit in, and move on.
Four mistakes employers make with gratuity, and how to avoid each
Most problems we see are timing and paperwork, not maths. Each one is fixable before it costs you.
First, missing the payment window. Employers must pay within 30 days of the amount becoming due, or interest applies, per the Fisher Phillips analysis. Put the date in your exit checklist and your full and final settlement workflow. Our note on closing out an India team shows the sequence.
Second, treating renewals as fresh starts. Back-to-back fixed-term contracts with the same person can look like one continuous service period. Track service across renewals rather than per contract.
Third, copying a home-country salary structure. Global teams often import a base-plus-bonus model. In India, that structure can push wages, PF and gratuity far from what you budgeted.
Fourth, leaving it off the offer letter. Candidates compare packages line by line. Stating gratuity clearly builds trust and avoids disputes later. For a wider view of exit costs, read our guide to termination, severance and notice rules.
How an EOR handles gratuity so your finance team doesn’t have to
When you hire through an Employer of Record in India, the EOR is the legal employer, so it calculates the accrual, tracks continuous service and pays out on time. You see a predictable line in your monthly invoice instead of a surprise at exit.
That doesn’t remove your role. You still decide contract length, pay structure and renewals, and those choices drive the cost. Our 50-question guide to EOR services in India covers how responsibilities split between you and the provider.
Your next step is a one-hour audit of every India contract
Pull every fixed-term contract and note the end date, the wage base and any renewals. Flag anyone who will cross one year of service in the next twelve months, then price their gratuity on the wider wage definition. That list is your real liability, and it takes an hour to build.
This post is general information, not legal advice. Confirm your specific position with qualified Indian employment counsel.