The 2025 labour overhaul has done more than just modify the paperwork for HR departments across the country. The new gratuity rules of 2025 change who qualifies, how fast they qualify, and how much they are likely to receive at exit.
What is gratuity and why the government is reshaping it
At its core, what is gratuity? It is a statutory lump sum your employer pays you as a reward for long and continuous service. Traditionally, you became eligible only after five years of continuous employment. The amount was linked to last drawn wages and years of service under the Payment of Gratuity Act.
The new gratuity law keeps the basic idea but modernises it for today’s labour market, where fixed-term contracts, gig roles, and frequent job changes, are common. Instead of treating gratuity as a rare benefit, the new framework tries to make it a standard social security benefit tied to real service, even if that service happens on a contract.
The key changes under the new gratuity rules
Under the consolidated labour codes, several new gratuity rules become applicable from 21st November 2025
- Fixed-term employees now become eligible after just one year of continuous service, instead of five years earlier
- The definition of “wages” has been broadened and must now form at least 50% of the total CTC, which directly lifts the salary base used for gratuity calculation
- Gratuity is explicitly recognised as part of the wider social security framework under the new codes, alongside PF and other benefits
The old five-year rule still broadly applies to permanent employees, but for fixed-term and many contract workers, waiting five years is no longer required. That shift alone pulls a huge chunk of the workforce into the gratuity net for the first time.
Who gains the most
The new gratuity rules for non-permanent private sector employees are especially significant in sectors like IT services, startups, BPOs, manufacturing, and logistics, where fixed-term contracts and frequent role changes are common. Under the older regime, someone who worked three different two-year contracts could walk away with zero gratuity despite six years of productive service.
Under the new gratuity rules 2025, that same pattern of employment starts to generate real benefits, provided each fixed-term stint crosses one year of continuous service with the same employer. The broadened wage definition also matters in the private sector, where companies used to keep basic salary artificially low and bulk up CTC with allowances. Now, with wages mandated at a minimum of 50% of CTC for many calculations, gratuity payouts for mid-level and senior-level staff in the private sector are set to be meaningfully higher than before.
How gratuity will now be calculated in practice
The usual formula structure still applies, but the numbers feeding into it change
Gratuity ≈ 15 ÷ 26 × last drawn monthly wages × completed years of service
The aspects to note here are the “last drawn monthly wages” and “completed years of service”
- Last drawn wages now sit on a stronger base because of the 50% wage rule
- Fixed-term employees get to count just one year of service, instead of waiting five years for the first rupee
Instead of doing the calculations manually, your best move is to use an updated gratuity calculator that reflects the new wage definition and one-year eligibility. You can plug in CTC values, like ₹6 lakh, ₹12 lakh and ₹24 lakh, and see before-and-after numbers under the new gratuity rules.
Group insurance and life insurance
It is easy to confuse different workplace benefits. And gratuity is very different from group insurance or life insurance.
- Gratuity is a statutory benefit linked to tenure and wages, payable when you leave after meeting eligibility
- Group insurance through your employer usually means group term cover or group health cover that protects you during your time with the company
- Personal life insurance (especially an individual term policy) is a separate contract you own, portable across employers and designed to replace your income if you die
The new gratuity law strengthens one pillar of your financial safety net, but it does not replace the need for strong group insurance at work and adequate personal life insurance outside work. On the contrary, the fact that your long-term benefits are getting bigger makes it more important to protect your earning years properly.
In an ideal setup
- Gratuity supports you during resignation, retirement, or downsizing
- Group insurance shields you from major medical or mortality risks during your job
- Individual life insurance ensures long-term protection even if you switch roles, opt for self-employment or face a gap between jobs
What you should do as an employee under the new regime
Do not wait for someone from the HR department to “explain everything later”. Under the new gratuity rules 2025, your decisions and awareness directly influence how much you eventually receive.
Use this simple checklist
- Read your revised appointment letter provided to you by someone from the HR department and make a note of how wages and allowances are now defined
- Put your CTC and last drawn wages into a reliable gratuity calculator that has been updated according to the new codes
- For longer-term career planning, factor in gratuity as a real asset when you think about when to switch jobs or how long to stay in a role
- Review your group insurance details and personal life insurance details, so that your total layer of protection is aligned with the growing value of your employment benefits
The new gratuity rules are clearly more employee-friendly than the old regime, especially for contract and fixed-term workers who previously got nothing despite multiple years of service. But the law only creates the framework. To actually benefit, you need to understand how the new gratuity law applies to your specific role, keep an eye on how your CTC is structured, and use tools like a gratuity calculator to translate legal jargon into rupee numbers. Combined with sensible use of group insurance and personal life insurance, the updated labour codes give you a stronger foundation for long-term financial security than the prior system ever did.
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