A garment export unit in Tiruppur takes on close to 40 machine operators every October, ahead of the peak shipping season, on fixed-term contracts that run about nine months. Historically, HR treated this group as a separate category entirely: no PF surprises, no gratuity liability, because “gratuity is for permanent staff after five years” was the rule everyone learned once and never rechecked. That assumption is now wrong, and it has been wrong since 21 November 2025.
Under the gratuity rules in India for 2026, fixed-term employees qualify for gratuity after just one year of continuous service, not five. The change sits in Section 53 of the Code on Social Security, 2020, and most payroll teams we talk to still haven’t adjusted for it.
Gratuity rules India 2026: one year, not five, for fixed-term staff
The Code on Social Security, 2020 came into force on 21 November 2025 along with the other three labour codes. Its official explainer from the Press Information Bureau is direct about this one: “the Government has reduced the eligibility requirement for gratuity for Fixed Term Employees (FTEs) from five years to one year. In case where the employee completes one year of continuous service, gratuity shall be applicable on proportionate basis” (PIB, 22 November 2025).
Two words in that sentence do the real work: “fixed term” and “proportionate.” This provision does not touch your regular permanent workforce, and it does not hand fixed-term staff a full year’s gratuity the way a five-year employee gets it. It gives them a slice, calculated for whatever they actually served beyond that first completed year.
What stayed exactly the same
It’s worth being precise here, because a lot of the recent commentary blurs “gratuity changed” into “gratuity changed for everyone.”
For your regular, permanent employees, the five-year continuous-service requirement is untouched. Death and disablement remain the only exceptions that waive it entirely, same as under the old Payment of Gratuity Act, 1972.
The calculation formula is unchanged too: 15 days’ wages for every completed year of service, computed as (last drawn basic pay plus dearness allowance) × 15 ÷ 26 × number of completed years. And the tax-exemption ceiling under Section 10(10) of the Income Tax Act is still Rs 20 lakh, a figure that has held since 2018 and was not touched by the new codes.
Coverage is unchanged as well: the Act, now folded into the Code, applies to factories and establishments employing 10 or more people. Under that threshold, gratuity liability doesn’t automatically apply, fixed-term or not.
How the pro-rata math actually works
Say a warehouse operator in Bhiwandi is hired on a fixed-term contract, last drawn basic plus DA of Rs 16,000 a month, and the contract runs one year and five months before it ends or isn’t renewed. Under the old rule, that employee got nothing, five years was the floor. Under the current rule:
- The employee has crossed the one-year eligibility mark, so gratuity applies.
- The “proportionate basis” language means the payout is calculated for the actual period served, not rounded up to a full year and not capped at only the first year.
- Applying the standard 15/26 formula to one year and five months of service gives a materially smaller payout than a five-year employee would receive, but it is no longer zero.
The Code doesn’t hand employers a separate formula for this case. It applies the existing calculation to the fixed-term employee’s actual tenure. What changes is the eligibility gate, not the arithmetic.
Does it apply to contracts signed before the code took effect?
The eligibility change came into force with the Code itself, from 21 November 2025 onward. Continuous service completed before that date still counts toward the one-year threshold. The Code doesn’t erase tenure a fixed-term employee already had; it changes what that tenure now qualifies them for. A fixed-term employee who started in April 2025 and is still with you today has already crossed one year of continuous service, and that year counts, even though most of it was served before the rule existed. If that employee’s contract is ending now, gratuity is due on exit under the current rule, not the one that applied when they were hired.
Why manufacturing, logistics and seasonal-hiring employers should care first
This provision lands hardest wherever fixed-term contracts are the default hiring pattern, not the exception: garment and textile units running seasonal production, warehousing and 3PL operators scaling up for a festive quarter, agro-processing plants hiring around harvest, and any business that has quietly treated “fixed-term” as a way to keep statutory liability off the books.
It isn’t, not anymore. A one-year contract renewed once, or a nine-month contract that rolls into a second one, now carries a real, calculable gratuity liability that finance has to provision for, the same way it already provisions for statutory bonus. Companies running high fixed-term headcount that haven’t touched their gratuity provisioning since before November 2025 are very likely under-accrued right now.
What HR and payroll should actually check this month
Start by pulling every fixed-term contract still active or renewed since 21 November 2025 and flagging anyone who has crossed, or is approaching, the one-year mark. Then check whether your payroll or HRMS classifies “fixed-term” as a distinct employment type at all, a lot of systems still lump it under “contract staff” with no gratuity trigger attached. Finally, get finance to re-run the gratuity provisioning estimate for the fixed-term headcount specifically, separate from the permanent-employee number they’re probably already tracking.
None of this is complicated once it’s flagged. It’s easy to miss entirely if your HRMS still treats employment type as a label rather than a rule that changes what gets calculated. IntelloHRM tracks gratuity eligibility separately for permanent and fixed-term employees, applies the correct trigger date for each, and flags the liability before it becomes a year-end surprise for finance. If statutory bonus is the other number your payroll calendar is re-checking this quarter, our statutory bonus calculation guide covers that one in the same detail.
Published 11 August 2026. Verified against the Press Information Bureau’s factsheet on the Code on Social Security, 2020 (22 November 2025) and Section 10(10) of the Income Tax Act on that date.
