For decades, gratuity in India had a simple gate: five years of continuous service or nothing. The Social Security Code, in force since 21 November 2025, removed that gate for one category: fixed-term employees now earn gratuity after just one year. The Ministry of Labour’s FAQs of 16 March 2026 settled the edge cases.

If you employ people in India on fixed-term contracts, directly or through an EOR, this changed your cost per hire, and most cost guides published before 2026 have not caught up.

The rules, as the Ministry has now clarified them

A fixed-term employee (FTE) becomes eligible for gratuity on completing one year of service from the start of the contract. Eligibility then accrues pro rata at 15 days’ wages per completed year of service, paid at contract end on last-drawn wages.

The edge cases the FAQs resolved:

An 11-month contract that ends on schedule earns no gratuity. This is why you will see more 11-month contracts in India, and why candidates have learned to ask about it.

An employee who exits a longer contract before finishing one year also earns nothing. The clock is service actually rendered, not contract length.

Fixed-term status covers only people the employer engages directly. Contract labour supplied through a staffing contractor is different: the contractor owes the gratuity, and the old five-year threshold still applies there.

Permanent employees still need five years. The one-year rule is specific to fixed-term contracts.

The part that changes your budget: the wage base grew too

Gratuity is calculated on “wages” as the Codes define them, and under the 50% wage rule, wages must be at least half of total remuneration. Before the Codes, many packages ran basic pay at 30 to 40% of CTC, which kept the gratuity base small. That structure is no longer available.

So two things compounded: fixed-term staff became eligible four years earlier, and the base on which gratuity is computed got bigger. The Ministry also confirmed the calculation applies on wages last drawn at exit under the new definition, even for service periods that began before November 2025.

Worked example

Take a fixed-term employee on a two-year contract at a CTC of Rs 24 lakh per year (Rs 2,00,000 per month). Under the 50% rule, wages are at least Rs 1,00,000 per month.

Gratuity at 15 days’ wages per completed year, using the standard 15/26 formula: Rs 1,00,000 × 15/26 × 2 years ≈ Rs 1,15,385 payable at contract end.

Under the pre-Code regime, this person would have received nothing: two years fell short of the five-year gate, and even a qualifying employee would have accrued on a basic salary of perhaps Rs 70,000 rather than Rs 1,00,000.

Per employee, that is roughly Rs 4,800 per month of accrual you should be provisioning from day one of year two. Across a 15-person fixed-term team, it is a lakh a year in liability that did not exist in 2024. Our India Hiring Cost Calculator includes this accrual in its fully loaded number.

What this means if you hire through an EOR

Most EOR engagements are structured as fixed-term contracts of one to three years, which puts nearly every EOR hire inside the new rule. Three questions to put to your provider, including us:

Does the quote include gratuity accrual, or does the invoice grow in year two? At Saileor, accrual is inside the flat fee quote from the start; there is no gratuity surprise at contract end. See pricing.

Is the salary structure Code-compliant? If your provider is still running 35% basic-pay structures to keep statutory costs down, the excess gets added back to wages by law, and the shortfall surfaces at exit, as your claim to defend. How we structure it: EOR in India.

What happens at renewal? Rolling an FTE contract does not reset the gratuity clock; service accumulates. Providers who imply otherwise are misreading the Code.

If you are still deciding between contractors, fixed-term EOR employment, and your own entity, the India Hiring Readiness assessment maps the options against your headcount plan, and the India Hiring FAQ covers the adjacent compliance questions.