New Gratuity Rules 2025 Explained: What Every Employee Should Know!

In November 2025, the government announced the implementation of the four labour codes to address pending workers’ needs regarding salary structures, aiming to move beyond colonial-era structures and align with modern global trends. As per the norms, the CTC, gratuity, and PF amounts have been updated along with the workers’ take-home salary. For looking through in-depth details, visit our other blog, ‘New Labour Code 2025‘.

Within the code of wages, one of the main changes highlights that the entire code for the working sectors is based on the worker’s gratuity tenure. In these updates, fixed-term workers become eligible for gratuity after completing one year of their tenure; however, the existing five-year eligibility for permanent employees remains unchanged.

The New Gratuity Rules explained 2025

According to the updated wages code, fixed-term workers become eligible for the gratuity after completing 1 year of their employment. For permanent employees, gratuity remains the same: it is paid after 5 years of service.

Under the New Gratuity Rules 2025, here’s what’s important,

1. This rule applies to fixed-term employees.
2. Fixed-term employees receive the amount exactly one year into their employment tenure.
3. Workers’ wage calculation must include 50% of the CTC.
4. The overall gratuity benefit ceiling (the tax-free limit) remains at ₹ 20 lakh.
5. Employers must release gratuity within 30 days of the employee’s exit. Otherwise, employers are penalised by 10%.
6. If a company make a delay in gratuity payment, a penalty or interest may be applicable.

However, the fixed-term employee receives the benefit; however, if they break the one-year continuation due to unforeseen circumstances, gratuity will not be available to the worker.

What exactly changes?

The new Wage Code transforms gratuity from a long-term loyalty benefit (5 years) into a short-term tenure-linked benefit (1 year) for fixed-term employees. Hence, if the contract were terminated after one year of service, the fixed-term employee would receive the gratuity amount along with their last drawn salary.

Who can avail Gratuity Benefits?

Though it is a government-enacted code for the employees, some categories of employees are included in the group, whereas others are not. In this section, let’s have a detailed discussion about who can avail gratuity benefits under the new Wages Code / labour-law changes in India.

Under the updated framework (2025 labour-code reforms), the following categories of employees are eligible for gratuity.

1. Fixed-term (contract) Employees

Employees hired for a specified period become eligible for gratuity after just 1 year of continuous service. Here, it is essential to note that fixed-term employees are not the same as permanent employees. For permanent employees, there is no agreement, whereas for fixed-term employees, they must sign a contract for a specific time period. Then their agreement would be renewed in accordance with further proposals.

2. Contract Workers

The contractual workers will not receive any gratuity benefits under the wage code updates. The overall payment process will proceed as before.

3. Permanent or Regular Employees

For permanent employees, the wage code has not introduced any new changes to gratuity eligibility. They will continue to receive gratuity after completing five years of continuous service, except in cases of death or disability, in which case the benefit becomes payable regardless of tenure.

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When Gratuity Becomes Payable

Gratuity is payable when an eligible employee’s service terminates under any of these circumstances: retirement, resignation, superannuation, death, or disablement.

Gratuity Amount Calculation as per the new wages code!

Under the new labour code, the calculation method for gratuity is the same as earlier.

Gratuity = (Last drawn salary × 15/26) × Number of years of service

“Last drawn salary” usually includes Basic pay + Dearness Allowance (DA) (or “wages” as per the wage-code definition) used for statutory benefits.

The factor 15/26 represents 15 days’ wages (half a month’s salary), assuming 26 working days per month.

Now, according to the new updates of the gratuity rules under the Wage Code Act 2025, fixed-term employees become eligible even after just 1 year of service. However, the method of calculation and formula shown above remains unchanged.

Let’s discuss with an example,

Suppose a fixed-term employee worked for 3 years, and at exit, their last drawn Basic + DA was ₹ 40,000 per month.

Their gratuity would be calculated as:

Gratuity = (₹ 40,000 × 15/26) × 3

≈ (₹ 40,000 × 0.5769) × 3

≈ ₹ 23,077 × 3

≈ ₹ 69,231

So, the fixed-term employees would receive approximately ₹ 69,231 as gratuity (before any statutory caps or adjustments).

In the End

The new gratuity rules of 2025 aim to bring greater clarity, fairness, and transparency to employee benefits. By standardising eligibility, calculation methods, and compliance requirements, these updates help protect employee rights while enabling employers to manage gratuity obligations more efficiently and in line with evolving labour laws.