Gratuity After Just 1 Year — How Fixed-Term Employees Now Qualify

In one line: Under the proviso to Section 53 of the Code on Social Security, 2020, fixed-term employees (FTCs) qualify for gratuity on a pro-rata basis after just 1 year of continuous service — versus the standard 5-year rule that still applies to permanent staff.

The Statutory Shift

Old regime (Payment of Gratuity Act, 1972): Every employee, regardless of contract type, needed 5 years of continuous service.

New regime (Section 53, Social Security Code, 2020):

“Provided that in case of fixed term employment, the employee shall be entitled to gratuity on a pro-rata basis even if the period of fixed term employment is less than 5 years.”

Practical effect: an FTC employee completing 12 months becomes eligible. After 24 months — fully pro-rata for the entire period.

How to Calculate Pro-Rata FTC Gratuity

Formula: Gratuity = (Wages × 15 × Years of Service) / 26

For fractional years above 1, count proportionally — no 6-month rounding for FTCs (that’s a permanent-employee provision).

Worked Example

  • Employee: Software developer on 18-month FTC
  • Monthly wages (post-50% restructuring): ₹50,000
  • Service: 1 year, 6 months = 1.5 years

Gratuity = (₹50,000 × 15 × 1.5) / 26 = ₹43,269

Compare to old regime: zero — because the 5-year minimum wasn’t met. The shift to the new pro-rata rule means an 18-month FTC walks away with ~₹43,000 extra.

→ Calculate yours with the free Gratuity Calculator.

Who Counts As a “Fixed-Term Employee”?

Per Section 2(o) of the Code on Wages and Section 2(35) of the OSH Code, an FTC is an employee:

  1. Engaged for a definite period under a written contract
  2. With same hours, wages, allowances and benefits as a permanent employee in similar work
  3. Eligible for all statutory benefits including gratuity (pro-rata)
  4. Whose contract ends automatically on expiry — no retrenchment compensation needed

⚠️ Watch-out: misclassifying contract labour as FTC, or vice-versa, is a frequent compliance failure. Contract labour engaged via a contractor is not an FTC.

Why the Government Made This Change

  • Boost formalisation: FTCs were second-class citizens in the old regime. Now they get genuine social-security coverage.
  • Promote labour flexibility: companies more willing to offer FTCs knowing they’re not penalised.
  • Align with global standards: ILO Convention 175 on part-time work and fixed-term employment.

HR Implications — What Changes Operationally

  1. Gratuity accrual book-keeping — finance teams must provision gratuity from Day 366 (not Day 1,826) for every FTC
  2. Insurance / Trust Fund coverage — Section 57 mandates gratuity insurance; FTCs must be covered from Day 1
  3. Exit settlement timeline — 30 days under Section 56(3); delay = simple interest on unpaid amount
  4. F&F integration — gratuity for FTCs must be processed within the Section 17 Wages Code 2-day F&F window
  5. Contract template update — explicitly include gratuity clause in FTC contracts

Penalty For Denying Gratuity

  • Section 56(4): Interest at ~10% p.a. simple for the entire delay period
  • Section 134: Fine ₹50,000 to ₹3,00,000 for employer who fails to pay
  • Section 56(5): Disputed amount must be deposited with the competent authority
  • Repeat offence within 5 years: Imprisonment up to 6 months + fine up to ₹5,00,000

How This Connects to Other New Rules

  • 50% basic rule: Since gratuity is calculated on Section 2(88) “wages,” and basic must be ≥50% of CTC, FTC gratuity amounts are materially higher than under the old regime
  • Appointment letter mandate: Every FTC must have a Section 6 OSH compliant letter stating the fixed-term tenure
  • Gig & platform workers: Different vehicle entirely — social security via aggregator contributions, not employer gratuity

What HR Must Do This Quarter

  1. Identify every FTC currently on rolls with more than 12 months service — they’re already eligible
  2. Update payroll software to provision gratuity for FTCs from Day 366
  3. Top up your gratuity insurance or trust to cover FTC liability
  4. Revise FTC contract template — add “Gratuity payable on pro-rata basis per Section 53, Code on Social Security 2020”
  5. Train HR Ops on new F&F SOP (gratuity within 2 days of last working day)
  6. Brief CFO — provision liability hit may be 5–8% of FTC payroll annually

Frequently Asked Questions

My FTC ended at 11 months. Am I eligible? No. Section 53 requires at least 1 year (12 months) of continuous service. Anything below — no gratuity. Note: Labour Courts are increasingly treating serial 11-month contracts as permanent employment.

I’ve been on three back-to-back 6-month contracts with the same employer. Total 18 months. If same employer and same role, periods are likely treated as “continuous service” under Section 54. You’re probably eligible. Get legal advice — these fact-patterns vary.

Is gratuity insurance compulsory? Section 57: yes, for every employer except government establishments and those maintaining an approved gratuity fund for 500+ employees.

What’s the maximum FTC gratuity? Same ₹20,00,000 ceiling applies. Above this is taxable under Section 10(10) of the Income Tax Act.

Does an FTC need to complete 240 days/year like the old Act? Section 54’s continuous-service test applies — 180 days of work in 12 months equals continuous service under the new Code (reduced from 240 under the old Factories Act).

Last verified: 8 May 2026

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