Gratuity Rules: The government has introduced a significant change to gratuity regulations. Employees will now qualify for gratuity after just one year of employment, a shift from the previous requirement of five years of continuous service. This new rule will come into effect on November 21, 2025, as part of the updated Labor Codes.
The government has specified that this new guideline will only apply to employees who start working after November 21, 2025. Therefore, the old rule, which mandates a minimum of five years of service, will still be in place for those who were employed before this date.
What does gratuity mean?
Gratuity is essentially a form of monetary appreciation given to employees. This payment can provide considerable support for many individuals when they leave their jobs.
Who will benefit?
It’s crucial to understand that the one-year eligibility rule does not apply to everyone:
Fixed-term employees (FTE): Those hired on a contract basis for a specific duration (like 1 or 2 years) will now be eligible for gratuity after completing one year of service.
Contract workers: They will also receive gratuity benefits on a pro-rata basis.
Regular/Permanent Employees: Permanent staff members still need to meet the standard five-year service requirement, except in cases of death or disability.
When will the rule come into effect?
The government has confirmed that this rule will be effective starting November 21, 2025, meaning that employees who join after this date will be governed by the one-year gratuity rule.
Changes in Gratuity Calculation
Gratuity calculations will now factor in basic salary, dearness allowance (DA), and retaining allowance. The total of these components must be at least 50 percent of the CTC (Cost to Company).
While the previous regulations capped the basic salary at 30 percent, the new rules, with a 50 percent cap, could potentially increase gratuity by around 66 percent. Experts suggest that the lump sum gratuity received upon an employee’s exit will now be greater than before, as the new calculation will incorporate both the basic salary and allowances.
There will be a huge increase in the amount of gratuity
Not only have the eligibility years been reduced, but the method of calculating gratuity will also change. According to the new rules, gratuity will be calculated by including basic salary, dearness allowance (DA), and retaining allowance. The new labor code stipulates that an employee’s allowances cannot exceed 50% of their total CTC. This simply means that your basic salary will now be at least 50% of your total salary. Since gratuity is calculated based on your basic salary, experts believe that the new rules could increase your gratuity amount by up to 66%.
In today’s world, people change jobs rapidly. The five-year lock-in period was a barrier for many employees, causing them to lose a portion of their hard-earned income. Now, with the one-year eligibility period, employees will have a substantial “thank you amount” upon leaving their job, which will strengthen their financial security.