Sleet

Gratuity for Fixed-Term Employees After One Year: How to Calculate and Provide for It

Nihit Dobariya
Payroll
5 min read
Quick answer

Under the Code on Social Security, fixed-term employees earn gratuity after one year of service, instead of five, at 15 days' wages per completed year. Wages follow the Code's definition with the 50% rule. Employers should provide about 4.81% of wages monthly for fixed-term staff and update their contracts.

Indian site worker in a safety vest at an industrial workplace

Fixed-term contracts became popular partly because staff on one- or two-year terms never reached five years of service, so no gratuity was due. The Code on Social Security changed that. The free calculator also handles pro-rata gratuity for fixed-term staff.

Key points covered in this guide: The rule, The formula, A worked example, What to change

The rule

  • ✓A fixed-term employee is entitled to gratuity on completing one year of service under the contract, instead of five.
  • ✓It is pro rata: 15 days' wages for each completed year.
  • ✓Permanent employees still need five years of continuous service, except in cases such as death or disablement.

The formula

Gratuity = 15 ÷ 26 × last drawn monthly wages × completed years of service

"Wages" follow the Code's definition: basic, dearness allowance and retaining allowance, with excluded allowances added back if they exceed 50% of total pay.

A worked example

A fixed-term quality inspector in Ahmedabad on a two-year contract earns ₹30,000 a month in total. Basic and DA are ₹12,000, and allowances are ₹18,000.

  • ✓Allowances are 60% of pay, so 10% (₹3,000) is added back. Wages for gratuity: ₹15,000.
  • ✓Gratuity for two years: 15 ÷ 26 × ₹15,000 × 2 = ₹17,308.

Before the Code, the same employee would have received nothing.

What to change

  1. Provide for gratuity monthly for fixed-term staff from day one, at about 4.81% of wages (15 ÷ 26 ÷ 12).
  2. Update fixed-term contracts to mention gratuity, the wage base and the payment timing on completion.
  3. Pay on completion with the final settlement.
  4. Check contract renewals. Back-to-back renewals count as continued service.
  5. Review agency staff. Gratuity for contract workers is the contractor's liability, but it shows up in their rates.

Frequently asked questions

Does a fixed-term employee who leaves after 11 months get gratuity?

Under the Code, the entitlement starts on completing one year.

Is gratuity paid on a fixed-term employee's partial second year?

Gratuity is worked out on completed years. Some employers count more than six months as a full year, as with permanent staff; check your state's practice and your policy.

Is gratuity taxable?

For non-government employees, gratuity is tax-free up to ₹20 lakh in a lifetime, subject to the formula limits.

Sources

This is a summary, not legal advice. Confirm with a labour-law professional.

Nihit Dobariya

Written by

HR Manager, Airwix Technologies (Sleet)

Nihit Dobariya is the HR Manager at Airwix Technologies in Ahmedabad, where he runs HR and payroll for the team behind Sleet. He writes about payroll, PF and ESIC, professional tax, the labour codes and everyday HR practice for Indian employers, and checks each rule against the official notification before it is published.

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