New Gratuity Rules 2025: What Salaried Employees Must Know Under India’s Labour Codes

The Indian government has introduced major labour reforms with the implementation of four new Labour Codes, effective November 21, 2025. These codes consolidate 29 existing labour laws into a simplified framework, significantly impacting how gratuity benefits are calculated and disbursed.

Understanding these updates is crucial for salaried employees, fixed-term workers, and gig economy participants to plan finances and ensure entitlement to gratuity.

This guide covers everything salaried employees need to know about the new gratuity rules 2025.

1. Gratuity Eligibility Reduced to 1 Year for Fixed-Term Employees

Key Change:

Previously, 5 years of continuous service were required for gratuity under the Payment of Gratuity Act, 1972. The Code on Social Security, 2020, now allows fixed-term employees to receive gratuity after 1 year of continuous service (i.e., a minimum of 240 working days).

Who Qualifies as a Fixed-Term Employee?

Hired through a written contract for a fixed period or project. Employment automatically terminates upon the expiration of the contract.

Industries with Fixed-Term Hiring:

• Manufacturing & Textiles
• IT & Digital Services
• Construction & Infrastructure
• Media & Entertainment
• Logistics & E-Commerce
• Hospitality & Tourism
• Export-oriented Businesses

Important: Permanent employees still require 5 years for gratuity eligibility. Only fixed-term employees benefit from the 1-year rule.

2. New 50% Wage Rule Increases Gratuity

Wage Restructuring:

Under the Code on Wages, 2019, Basic Salary + Dearness Allowance (DA) must be at least 50% of total CTC. Previously, many companies kept basic pay at 25–40% to reduce statutory contributions.

Impact on Gratuity:

Allowances exceeding 50% of CTC are now included in gratuity and PF calculations, increasing retirement benefits.

Example (10 Years of Service):

Trade-Off: Higher long-term benefits but slightly lower monthly take-home salary.

3. Gratuity Calculation Formula & Tax Rules Stay the Same

Gratuity Formula for Employees Covered Under the Act:

Gratuity = Last Drawn Salary × (15/26) × Years of Service

• Last Drawn Salary = Basic + DA
• 15 = 15 days of wages
• 26 = average working days/month
• Years of Service = rounded to nearest full year

For Non-Covered Employees:

Gratuity = Last Drawn Salary × (15/30) × Years of Service

Tax Exemption Limits:

• Exceeding ₹20 lakh is taxable.
• Nominee gratuity for death or disability is fully exempt.
• For FY 2024-25 onwards, Section 115BAC allows ₹5,00,000 exemption under new tax regime.

Proper filing of your Income Tax Return (ITR) is essential to claim these exemptions correctly and avoid complications. It’s also wise to know how to avoid notices from the Income Tax Department.

4. Mandatory 30-Day Payment & Penalties for Delay

Employer Obligations:

Employers are mandated to pay gratuity within 30 days from the date it becomes payable.

Penalties for Non-Compliance:

If an employer fails to pay within this timeline, the following consequences apply:

Employee Remedies:

Employees who face gratuity payment issues can:

1. File a claim with the Controlling Authority under the Payment of Gratuity Act
2. The application must be submitted within 30 days of separation
3. Approach labour courts for dispute resolution

Forfeiture Rules:

Gratuity may be forfeited only under:

1. Willful damage/loss of employer property
2. Misconduct involving moral turpitude
3. Fraudulent employment/false certificates

Impact on Gig Workers and Platform Economy

1. Recognised under Code on Social Security, 2020.
2. Not eligible for traditional gratuity, but platforms must contribute 1–2% of turnover to the social security fund (capped at 5% of payments).
3. Covers life & disability insurance, health, maternity, and old-age benefits. Gig workers should also review specific tax tips for freelancers in India to manage their overall financial obligations.

Key Takeaways for Salaried Employees

Action Steps for Employees

1. Review Your Salary Structure: Check if your Basic + DA currently meets the 50% threshold. If not, expect restructuring from your employer.
2. Understand Your Employment Type: Confirm whether you’re classified as permanent or fixed-term—this determines your eligibility period.
3. Track Your Service Period: Maintain accurate records of your joining date, as even months matter for gratuity calculations.
4. Nominate a Beneficiary: Complete Form F after one year of service to nominate a family member for gratuity in case of death.
5. Plan for Reduced Take-Home: With higher statutory deductions, adjust your monthly budget accordingly.  For comprehensive financial planning, especially for business owners adjusting to these new costs, strategic planning services can be invaluable.

Conclusion

The Labour Codes 2025 modernise gratuity rules, providing 1-year eligibility for fixed-term employees and higher payouts for all due to the 50% wage rule. These reforms create a transparent, equitable labour ecosystem that benefits permanent, contractual, and gig workers alike.

For companies, ensuring accurate payroll processing under these new rules is critical; professional payroll services can help manage this complexity efficiently.