Gratuity Now Payable After Just 1 Year Of Service, Double Overtime Payouts Introduced Under New Labour Codes

New Delhi: The central government has consolidated 29 existing labour laws into four simplified labour codes, which have now come into effect from Friday. Under the new framework, employees will become eligible for gratuity after just one year of service instead of the previous five-year requirement. Additionally, the gratuity ceiling has been doubled to Rs 20 lakh, and the entire amount will remain tax-free.

The new labour codes are expected to benefit crores of workers and employees by offering stronger protection, though they may also increase compliance responsibilities for employers. The updated codes—Code on Wages, Industrial Relations Code, Social Security Code and Occupational Safety, Health and Working Conditions Code—were passed in 2020, but implementation was delayed as rules were being drafted. States will now have to align their respective rules with the new structure.

According to the Labour Ministry, the codes will enhance ease of doing business and strengthen workers’ rights. They will be fully implemented nationwide by April 2025, benefiting more than 50 crore workers.

Gratuity Reforms: Higher Limit and Interest Penalty on Delay

The most significant change concerns gratuity. Employees will now be eligible for gratuity after one year of service, and the tax-free limit has been raised from Rs 10 lakh to Rs 20 lakh. Employers must pay gratuity within 30 days, failing which a 10 percent annual interest will be imposed along with possible doubled compensation. The provision applies to both public and private sector establishments. For instance, an employee completing five years of service will receive 15 days’ wages for each year, boosting financial security at retirement.

Double Overtime Pay and Stricter Work-Hour Rules

Overtime regulations have been tightened. Employees working beyond 9 hours a day or 48 hours a week will receive double wages as overtime. Mandatory overtime will only be allowed during emergencies such as equipment breakdowns. Workers may also opt for compensatory leave instead of payment. Weekly rest is compulsory, ensuring better work-life balance.

Improved Leave and Parental Benefits

Leave provisions have been upgraded. Employees will earn one paid leave for every 20 days of work, while annual earned leave has been increased to 30 days after one year of service. Maternity leave has been extended from 12 to 26 weeks, and for the first time, a 15-day paternity leave and adoption leave have been introduced. Fixed-term employees will receive benefits equivalent to permanent workers after three months of service.

Social Security Extended to Gig and Platform Workers

The new codes expand social security coverage. Employers must contribute 0.65% of wages toward the EDLI scheme, offering life and disability cover. For the first time, unorganised workers—including gig and platform workers such as delivery personnel and app-based drivers—will receive health insurance, accident cover and other social security benefits. Online registration is now mandatory for shops and establishments, with penalties up to Rs 5 lakh for violations.

Gratuity Calculation Example

The formula remains unchanged:
Gratuity = Final Basic Salary × (15/26) × Years of Service

For instance, an employee with a final basic salary of Rs 50,000 who resigns after one year will receive:
50,000 × (15/26) × 1 = Rs 28,847 — roughly Rs 28,800 for one year of service.

What Is Gratuity?

Gratuity is a financial benefit given by an employer as a token of appreciation for an employee’s service. It is calculated based on the employee’s tenure and basic salary.