Fixed-Term Employment: Gratuity After One Year
Under the Labour Codes, fixed-term employees can become eligible for gratuity after just one year of service. Here is how eligibility, calculation and employer duties work.
Under the Labour Codes, a fixed-term employee no longer has to wait five years to earn gratuity - eligibility can arise after just one year of continuous service, calculated pro-rata.
Key facts at a glance
- Fixed-term employees can become eligible for gratuity after one year of service, unlike the standard five-year threshold for regular employees.
- Gratuity for fixed-term staff is calculated on a pro-rata basis using the same basic-pay-and-dearness-allowance formula applied to permanent employees.
- A fixed-term contract must specify a defined period and give the employee wage and benefit parity with a comparable permanent employee.
- Fixed-term employees have no entitlement to notice or compensation simply because their contract period ends as scheduled.
- Employers must now provision for gratuity liability much earlier in a fixed-term employee's tenure than before.
- The change comes through the Labour Codes package that came into force nationally on 21 November 2025, subject to each state's own rule notification.
Why this matters for how businesses use fixed-term contracts
Fixed-term employment has become a common way for businesses to bring in specialised skills, manage seasonal demand, or staff project-based work without a permanent headcount commitment. Historically, because gratuity kicked in only after five years, many fixed-term arrangements never triggered any gratuity liability at all, since contracts typically ran for shorter durations.
The one-year gratuity rule changes that calculus. Even a one- or two-year fixed-term contract can now generate a real, budgeted liability, which businesses need to factor into cost planning for every fixed-term hire, not just long-tenured staff.
How eligibility and calculation actually work
Gratuity eligibility for fixed-term employees is based on completed continuous service, similar in principle to how permanent employee gratuity works, but with a materially shorter qualifying period. Once the one-year threshold is met, the amount payable is generally calculated proportionally to the length of service, rather than assuming a full-service gratuity payout designed for long-tenured employees.
This pro-rata approach means the gratuity amount for a one-year fixed-term employee will be substantially smaller than for someone completing several years, but it is still a real, calculable, and payable entitlement rather than a notional one.
Comparing gratuity eligibility: fixed-term vs regular employees
| Aspect | Regular (permanent) employee | Fixed-term employee |
|---|---|---|
| Minimum service for eligibility | 5 years continuous service | 1 year (pro-rata basis) |
| Calculation basis | Basic pay + dearness allowance formula | Same formula, applied pro-rata |
| Contract structure | Open-ended | Defined period, written contract |
| Wage/benefit parity requirement | N/A | Must match comparable permanent employee |
| Notice on contract end | Applicable per standard rules | No notice entitlement at scheduled contract end |
What employers need to update
Contract templates
Fixed-term employment agreements should clearly state the contract duration, wages, and confirm parity of working conditions and benefits with comparable permanent staff. Vague or informal fixed-term arrangements create ambiguity about when the gratuity clock starts.
Payroll and accrual systems
Finance and payroll teams should build gratuity accrual into fixed-term employee cost models from day one, rather than only starting to provision once an employee approaches the old five-year mark. This is a structural change to how the liability line item is projected in budgets.
HR record-keeping
Since eligibility now hinges on precise service duration for a much shorter window, accurate records of contract start dates, renewals, and any breaks in service become more consequential than before.
What happens at contract renewal or non-renewal
If a fixed-term contract is renewed and service continues without a genuine break, continuous service for gratuity purposes is likely to be assessed cumulatively. Employers should be cautious about using repeated short renewals purely to avoid gratuity accrual, since this can itself invite scrutiny and does not necessarily reset the eligibility clock in a way that survives challenge.
If you are not sure how your fixed-term hiring practices line up with the new gratuity rules, ComplianceCheck's labour code assessment gives you a clear picture in a few minutes.
Sources
- Ministry of Labour and Employment - labour.gov.in
- Employees' Provident Fund Organisation - epfindia.gov.in
- Respective state labour department websites
This guide is general information, not legal advice. Requirements vary by state, sector and headcount - confirm specifics with a compliance professional or the relevant authority.
Frequently Asked Questions
- Do fixed-term employees get gratuity after one year now?
- Yes, fixed-term employees are treated differently from the general five-year gratuity eligibility rule, with recognition of shorter continuous service, so a fixed-term employee completing one year of service can become entitled to gratuity on a pro-rata basis.
- How is gratuity calculated for fixed-term employees?
- Gratuity for fixed-term employees is generally calculated on a pro-rata basis relative to their period of employment, using the same basic-pay-and-dearness-allowance formula that applies to permanent employees, rather than requiring the full five years of continuous service.
- Does the one-year rule apply to all employees or only fixed-term ones?
- The shortened eligibility period is specific to fixed-term employment contracts under the Labour Codes; employees on regular, open-ended contracts generally still follow the standard continuous-service threshold for gratuity eligibility.
- What counts as a fixed-term employee under the Labour Codes?
- A fixed-term employee is someone engaged for a specific, predetermined period under a written contract, with the same working hours, wages and benefits as a comparable permanent employee doing similar work, and without any right to notice of non-renewal at contract end.
- Is gratuity for fixed-term staff mandatory or discretionary?
- It is a statutory entitlement, not a discretionary benefit, so employers engaging fixed-term staff need to budget and provision for gratuity liability from the start of the contract rather than treating it as optional.
- How should employers change their contracts for fixed-term staff?
- Employers should ensure fixed-term contracts clearly state the contract period, wages, and benefit parity with comparable permanent employees, and update payroll and accrual systems to provision for gratuity from an earlier point in the employment relationship.
- Does this increase employer cost for hiring fixed-term staff?
- Yes, in most cases, because gratuity provisioning now needs to begin much earlier in the employment relationship than the traditional five-year benchmark, which was rarely triggered for genuinely short fixed-term engagements.
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