India's New Gratuity Rules: Eligibility Reduced from 5 Years to 1 Year Benefiting Millions of Workers

India's government has implemented a significant modification to gratuity regulations, reducing the qualification period from 5 years to just 1 year. This substantial change impacts millions of workers across the country and is designed to enhance welfare measures while providing greater clarity on gratuity payments in various sectors.

The reform particularly benefits fixed-term employees who are contracted for specific projects or time periods. These workers will now qualify for gratuity benefits after completing only 1 year of service, providing them with improved financial security, especially during periods of job transition.

The revised gratuity regulations feature several important changes. Fixed-term employees now receive gratuity after just 1 year of continuous employment instead of waiting 5 years. The definition of 'wages' has been broadened to incorporate additional components, resulting in higher gratuity payouts. Gratuity calculations will now use a higher base amount, directly benefiting employees. Employers must disburse gratuity within a 30-day timeframe or face a 10% annual interest penalty.

These new provisions are expected to promote formal employment practices, encourage direct hiring, and reduce excessive contractualization in the workforce. Employers will need to update their HR and payroll systems to accommodate the expanded wage definition. Additionally, fixed-term employees will now be entitled to the same salary structure, leave benefits, medical coverage, and social security provisions as regular employees.

Gratuity becomes payable when an employee's employment terminates after they have provided continuous service for at least five years. This applies in cases of superannuation, retirement or resignation, or death or disablement resulting from accident or disease.

In the event of an employee's death, their gratuity payment will be directed to their nominated beneficiary. If no nomination exists, the amount will be given to their legal heirs. For minor nominees or heirs, the gratuity share will be "deposited with the controlling authority, who shall invest the same for the benefit of such minor in such bank or other financial institution".

These regulations apply to every factory, mine, oilfield, plantation, port, and railway company, as well as any shop employing ten or more people on any day during the preceding twelve months.

Gratuity calculation follows a specific formula: Gratuity = (Last drawn salary x 15/26 x Years of service). The last drawn salary includes the basic salary and dearness allowance. The figure 15 represents the number of days in a month as per labor laws, while 26 signifies the average working days in a month. Years of service refers to completed years, rounded to the nearest integer.

The maximum gratuity amount is capped at Rs 20 lakhs under the Payment of Gratuity Act, 1972. If a calculated gratuity exceeds this threshold, the employee will receive the maximum limit of Rs 20 lakhs. Importantly, gratuity payments are tax-exempt for the employee.