Gratuity for Fixed-Term Employees under the Social Security Code: Eligibility, Formula and Forms

The Code on Social Security, 2020 came into force on 21 November 2025 and replaced the Payment of Gratuity Act, 1972. One of its most practical changes is for fixed-term employees: they now qualify for gratuity after one year of service, instead of five. This article sets out who qualifies, how the amount is calculated, and the forms and timelines under the Social Security (Central) Rules, 2026.

1. Who is a fixed-term employee

A fixed-term employee is engaged directly by the employer, on its own rolls, on a written contract for a fixed period. The Code requires a fixed-term employee to get the same hours of work, wages, allowances and other benefits as a permanent worker doing the same or similar work.

This is different from contract labour engaged through a contractor. Contract labour is not covered by the one-year rule; the five-year condition continues to apply, and the contractor, as the employer, is liable for gratuity.

2. Eligibility: one year versus five years

• Fixed-term employees: eligible after one year of service under the contract. The Labour Ministry's FAQs (30 December 2025 and 16 March 2026) confirm this.
• Permanent employees: the five-year condition continues, except on death or disablement, where it does not apply (Ministry FAQ 11, 30 December 2025).

Service of more than six months in the final year counts as a full year.

3. The formula

Gratuity = Last drawn wages × 15 ÷ 26 × Years of service

"Wages" means basic pay, dearness allowance and retaining allowance. If excluded allowances exceed 50% of total remuneration, the excess is added back. The Labour Ministry's FAQ of 16 March 2026 states that gratuity on the revised definition of wages applies from 21 November 2025.

The maximum gratuity payable is ₹20 lakh (Ministry FAQ 12, 30 December 2025).

4. Worked examples

Last drawn wages of ₹20,000 a month:

• Fixed-term contract of 1 year: 20,000 ÷ 26 × 15 × 1 = ₹11,538
• Fixed-term contract of 2 years: 20,000 ÷ 26 × 15 × 2 = ₹23,077
• Fixed-term contract of 1 year 7 months: the 7 months exceed six months, so service counts as 2 years = ₹23,077
• Fixed-term contract of 11 months: less than one year, so no gratuity
• Permanent employee leaving after 2 years: no gratuity, because the five-year condition applies

5. Forms and timelines (Social Security (Central) Rules, 2026)

The Central Rules were notified on 8 May 2026 and apply where the Central Government is the appropriate government. States notify their own rules for other establishments.

• Form III: nomination. The employer verifies it and returns an attested copy.
• Form IV: application for gratuity, within 30 days of gratuity becoming payable. Legal heirs have one year. Late applications can be accepted for sufficient cause.
• Form V: the employer's notice admitting or rejecting the claim, within 15 days of receiving the application.
• Payment: within 30 days, by demand draft or bank transfer, if the claim is admitted.

6. Tax treatment

For private-sector employees, gratuity is exempt up to a lifetime limit of ₹20 lakh. From 1 April 2026 the exemption sits in Section 19 of the Income-tax Act, 2025 (earlier Section 10(10) of the 1961 Act). Any amount above the limit is taxable as salary.

7. What employers should do

1. Identify every fixed-term employee on the rolls and their contract dates.
2. Recompute gratuity provisions on the revised wage definition from 21 November 2025.
3. Collect fresh nominations in Form III.
4. Build gratuity into the exit process for every fixed-term contract that completes one year.
5. Keep contract labour engaged through contractors separate: the contractor's liability and the five-year rule apply there.

8. What fixed-term employees should check

1. Are you on the company's rolls, or engaged through a contractor?
2. Has your contract run for one year or more, or more than six months into the next year?
3. Is gratuity calculated on wages including any allowances above 50% of pay?
4. Did you receive a Form V response within 15 days of applying?

Conclusion

The one-year rule is a real gain for fixed-term employees, but it applies only to those engaged directly by the employer. Employers should update provisions and exit processes now, because gratuity on the revised wages has applied since 21 November 2025.

Disclaimer: General information based on the Code on Social Security, 2020, the Social Security (Central) Rules, 2026 and the Labour Ministry's FAQs, as of October 2026. Not legal or tax advice. State rules may differ.

The author is the founder of HR Calcy, which publishes free payroll calculators and guides on India's Labour Codes. He is an independent HR and payroll consultant with 16+ years in Indian HR and payroll, holds a Post Graduate Certification in HRM from XLRI Jamshedpur and SHRM, and is an ISO 9001:2015 Lead Auditor (BSI).