What Are the New Gratuity Rules for Fixed-Term Employees?

Expiry of the term triggers gratuity for a fixed-term employee. Section 53(1)(d) of the Code on Social Security, 2020 lists "termination of his contract period under fixed term employment" as one of the events on which gratuity is payable, together with superannuation, retirement or resignation, and death or disablement. Under the second proviso to section 53(1), completion of five years of continuous service "shall not be necessary" where the employment ends by death, disablement, expiration of fixed term employment, or an event the Central Government notifies.

Under the third proviso to section 53(2), where an employee is on fixed term employment, the employer pays gratuity on a pro rata basis. Pro rata here means the statutory formula applied to the service actually rendered, not a proportion of some larger sum the employee would have earned had the contract continued.

Section 2(34) defines fixed term employment as the engagement of an employee on a written contract for a fixed period, subject to two provisos. The first is parity: hours of work, wages, allowances and other benefits must be no less than those of a permanent employee doing the same work or work of a similar nature. The second states a general rule, of which gratuity is only one instance:

he shall be eligible for all benefits, under any law for the time being in force, available to a permanent employee proportionately according to the period of service rendered by him even if his period of employment does not extend to the required qualifying period of employment

The Industrial Relations Code, 2020 also defines "fixed term employment", at section 2(o), but as the engagement of a worker, and that definition contains only the parity proviso. The proportionate-benefits requirement is in the Social Security Code alone, and gratuity is governed by that Code. Which definition applies depends on the person’s classification as an employee or worker.

Neither resignation nor early termination by the employer qualifies as expiry of a fixed term for this purpose. Resignation before the term ends is a resignation, tested against the ordinary five-year condition, because the second proviso names expiration and not departure. A contract that the employer terminates early ends by termination, not by expiry. A contract that is not renewed has expired, and expiry is what the second proviso names.

Fixed-term employment and contract labour are different arrangements with different payers. A fixed-term employee is the employer's own employee on a written contract for a fixed period, under section 2(34). Contract labour is another employer's worker, hired in or in connection with the principal employer's work by or through a contractor, under section 2(1)(m) of the Occupational Safety, Health and Working Conditions Code, 2020 (OSH Code). Section 2(27) of the Code on Social Security defines "employer" to include a contractor, so a contract-labour worker makes a gratuity claim against the contractor who employs them, under the ordinary gratuity procedure rather than the fixed-term procedure.

The label used in the paperwork does not determine the employment relationship. A person engaged directly by an employer on a written fixed-period contract is a fixed-term employee whatever the contract is headed, and a person on a vendor's rolls working under a work order is contract labour however the employer's HR system records them. Where the arrangement is genuinely mixed, the question is who employs the person rather than who directs the work day to day.

The one-year minimum in rule 33 does not cover contract labour: it is a fixed-term rule, and the ordinary five-year condition applies to a contract-labour worker's claim against their own employer. Under section 55(3) of the OSH Code, a principal employer is instead liable to pay contract labour their wages, in full or the unpaid balance, where the contractor fails to pay them within the prescribed period or makes short payment, and recovers the amount from the contractor.

When contractor-supplied staff become an employer's direct fixed-term employees, that employer assumes the gratuity liability for their new contracts. A fresh one-year qualifying period starts for each person, without credit for service with the contractor.

An employee whose fixed term expires after 11 months is not eligible for gratuity. An employee whose fixed term expires after exactly twelve months is eligible, because the minimum service period is met, and one year is counted. Eighteen months counts as one year, because the six months after the first year are not in excess of six months. Section 53 itself prescribes no one-year threshold. The minimum service requirement is prescribed by the second proviso to rule 33(1)(a) of the Social Security (Central) Rules, 2026, which makes an employee on fixed term employment eligible for gratuity "if he renders service under the contract for a period of at least one year", and rounds a subsequent period "in excess of six months and more, but less than one year" up to one additional year.

Section 53(2) gives gratuity "for every completed year of service or part thereof in excess of six months". A part-year of exactly six months is not in excess of six months, so it does not round up. A part-year of six months and a day does.

Rule 33 requires at least one year under the contract as a condition of eligibility; the number of years counted is a separate question, and section 53(2) then determines the payable years by counting completed years plus any part in excess of six months.

Under section 54, continuous service is measured against the employer rather than against the contract. An employee is in continuous service where the service is uninterrupted, and interruptions for sickness, accident, leave, lay-off, a strike or a lock-out not caused by the employee's own fault do not break it. Where the service is not uninterrupted in that sense, section 54 deems a year from a stated number of days actually worked, so a person with a genuinely broken year is not automatically excluded from the count.

Renewing the contract does not restart the one-year qualifying period if the service is continuous. The one-year minimum in rule 33 is a period of "service under the contract", and section 54 measures continuous service against the employer rather than against a document. An employee in uninterrupted service does not lose that service because the contract was reissued.

A person on three consecutive twelve-month contracts with the same employer, with no real break between them, has three years of continuous service and not three separate one-year engagements. Whether an employer avoids gratuity by using successive 11-month contracts is therefore a question about the facts rather than the drafting. Where the person keeps working through the notional gap, the service is continuous under section 54 and the years accumulate.

A real break in service, where the person leaves, is paid out and is later re-engaged, does start a new period. What makes the break real is the absence of employment during the gap, not the absence of a contract document. A gap created on paper while the person keeps working, keeps their identity card and keeps reporting to the same manager is not a break, and treating it as one results in a liability payable later, with interest.

On a change of employer, where a person moves from a contractor's rolls to an employer's own, or between group companies, the service with the previous employer does not transfer to the new employer by itself. Each employer counts its own period under section 54, unless something else, such as a transfer arrangement recognising past service, provides otherwise.

Record the start date of the first contract, record every renewal against it, and record any real break with the date it began and the date it ended. That record is needed to respond to a claim made three renewals later.

How gratuity is calculated under the new labour codes is fixed by the Code itself, so company policy does not affect it. The formula is the same one the repealed Payment of Gratuity Act, 1972 set, applied to a new wage base. Section 53(2) gives fifteen days' wages for every completed year of service, or part thereof in excess of six months, based on the rate of wages last drawn. Explanation 3 is the source of the 15/26 formula: for a monthly-rated employee, fifteen days' wages means the monthly rate of last drawn wages divided by twenty-six and multiplied by fifteen. The divisor is twenty-six rather than thirty, and using thirty understates every gratuity payment by about thirteen per cent.

The wage base is wages as defined in section 2(88) of the Code on Social Security, not the Code on Wages definition and not CTC. Under section 2(88), wages means all remuneration, whether by way of salaries, allowances or otherwise, and includes basic pay, dearness allowance and retaining allowance, with a list of exclusions. Section 2(88) contains the same add-back proviso as the corresponding Code on Wages definition, known as the 50% wage rule: where the excluded components exceed one-half of all remuneration, the excess is deemed remuneration and included in wages. A structure that allocated most of the package to allowances therefore has a higher wage base than it used to, and every gratuity calculated on those last drawn wages increases accordingly. Classify each component under section 2(88).

The calculation has three steps:

1. Establish the wage rate last drawn, on section 2(88), for the wage period ending with the termination.
2. Divide by 26 and multiply by 15 to get fifteen days' wages, for a monthly-rated employee.
3. Multiply by the number of years counted, applying the "in excess of six months" rounding.

For a piece-rated employee, the first proviso to section 53(2) provides that daily wages are computed on the average of total wages received in the three months immediately preceding termination, and wages paid for overtime work are left out of that average. For a seasonal establishment employee not employed throughout the year, the second proviso requires payment of seven days' wages for each season.

Section 53(3) caps gratuity at "such amount as may be notified by the Central Government". Under section 164(2)(a), S.O. 1420(E) of 29 March 2018, made under section 4(3) of the repealed Payment of Gratuity Act, 1972, continues to fix that amount at ₹20 lakh until the Central Government notifies another. Section 53(6) allows forfeiture: to the extent of the damage where services were terminated for an act, wilful omission or negligence causing damage, loss or destruction of the employer's property, and wholly or partly where they were terminated for riotous or disorderly conduct, any other violent act, or an offence involving moral turpitude committed in the course of employment. Under section 53(5), nothing in the section affects an employee's right to better terms of gratuity under any award or agreement or contract with the employer. A contract promising more than the statute is enforceable at the higher figure.

Gratuity is due within 30 days, whether or not anyone applies. Section 56(3) requires the employer to arrange payment "within thirty days from the date it becomes payable". Under section 56(2), as soon as gratuity becomes payable, the employer must determine the amount and give written notice to the person entitled and to the competent authority, whether or not an application has been made.

Rule 33 sets out a separate claim procedure, with its own forms and a time limit measured from receipt of the application: the eligible claimant applies in Form IV, ordinarily within thirty days of the gratuity becoming payable, with a late application admissible for sufficient cause; the employer issues Form V within fifteen days of the application, specifying the amount and fixing a payment date no later than thirty days from receipt.

The employer owes from the date the gratuity became payable, and a person who never files Form IV does not thereby extend the employer's time. For a fixed-term employee, gratuity becomes payable on the date the term expires, so the notice under section 56(2) and the thirty days both run from a date the employer knows in advance.

Late payment costs interest. Section 56(4) charges simple interest from the date the gratuity became payable to the date it is paid, at a rate not exceeding the rate the Central Government notifies from time to time for repayment of long term deposits. Under the repealed Payment of Gratuity Act, 1972, S.O. 874(E) of 1 October 1987 specified 10% a year under section 7(3A), which let the Central Government specify the rate by notification. Section 56(4) omits those words, so whether the 10% continues under section 164(2)(a) is unsettled. The only case in which interest is not payable is where the delay is due to the employee's own fault and the employer has obtained written permission from the competent authority for the delayed payment on that ground. The permission has to have been obtained rather than applied for. Failure to pay gratuity is also an offence under section 133(1)(g), punishable with imprisonment of up to one year, a fine of up to ₹50,000, or both, but under section 137 the employer must first be given a written direction with a period to comply, and compliance within that period bars prosecution unless a violation of the same nature is repeated within three years.

Forfeiture under section 53(6) is not self-executing: each ground attaches to a termination for a stated reason, so forfeiture presupposes a termination on that ground, which a fixed-term expiry is not. An employer that lets a term expire and then withholds gratuity for past misconduct is relying on a provision whose trigger never occurred.

Explanation 1 to section 53 excludes from "employee", for the purposes of Chapter V, a person who holds a post under the Central Government or a State Government and is governed by another Act or by rules providing for payment of gratuity.

Where the amount or the entitlement is disputed, section 56(5) requires the employer to deposit with the competent authority the amount it admits is payable, and permits the employer, the employee or any other person raising the dispute to apply for a decision. The authority decides after inquiry and after hearing the parties. An appeal lies within sixty days of receipt of the order, extendable by a further sixty days for sufficient cause. Depositing the admitted amount is not an admission of the disputed balance, and it stops interest running on the part that was never in dispute.

For every fixed-term exit, HR should keep three records: the contract with its start and end dates, the section 2(88) wage computation for the last wage period, and the dated notice under section 56(2) with proof of when it was sent.

The Code on Social Security, one of India's four Labour Codes, has been in force since 21 November 2025 and the Social Security (Central) Rules, 2026 since 8 May 2026, so both sets of time limits have applied to fixed-term exits since those respective commencement dates. The entitlement itself does not depend on State rules being notified: the Code confers it, and the Code extends to the whole of India. The forms, the procedure and the competent authority can differ by sphere, because the appropriate Government makes the rules, and the applicable procedure depends on which States have notified their rules. For provident fund and State insurance, apply the separate PF and ESI contribution rules to the same exit.