Salary, PF and Gratuity: Key Changes Under the New Labour Codes 2025

The Union government has introduced major changes to India’s labour regulations by reducing the gratuity eligibility period for fixed-term employees to one year. This decision is part of a broader reform announced on November 21, under which several existing labour laws have been reorganised into four unified Labour Codes. These Codes aim to modernise the labour framework, simplify compliance and provide more consistent protections across the workforce.

Understanding the New Labour Codes

The New Labour Codes, effective from 21 November 2025, replace 29 earlier laws with a single, standardised framework covering wages, social security, working conditions and occupational safety. These Codes apply to salaried workers in the organised sector and extend to fixed-term, contractual, gig and platform workers as well. The Code on Wages sets clear rules on minimum wages, timely payment and a uniform definition of wages.

The Social Security Code brings together EPF, ESIC, gratuity, maternity and disability benefits. The Industrial Relations Code focuses on trade unions, retrenchment rules and dispute redressal, while the Occupational Safety, Health and Working Conditions (OSH) Code governs working hours, leave policies and workplace safety norms. Together, these Codes are designed to create a more predictable, worker-friendly and simplified labour system for India’s modern economy.

Why an Overhaul Was Necessary

India’s earlier labour laws were created in the mid-20th century, when the nature of work and employment patterns were entirely different. Over the decades, these laws became fragmented, overly complex and difficult to navigate. Employers frequently struggled with compliance because provisions were scattered across multiple Acts and workers often faced uncertainty in understanding their rights. 

The new Labour Codes replace outdated, inconsistent provisions with a uniform system that aligns with contemporary workplace realities. The goal is to protect worker welfare, ensure social justice, simplify administration for employers and align India’s labour framework with global standards.

Gratuity Eligibility After One Year for Fixed-Term Employees

One of the most important changes in the new Codes is that fixed-term employees now become eligible for gratuity after just one year of continuous service. Earlier, gratuity usually required five years with the same employer, meaning that most employees on 1–3 year contracts never qualified. 

Under the new rules, any fixed-term worker completing one year of service is entitled to gratuity, with the tax-free limit remaining Rs 20 lakh. This change is particularly significant for sectors like IT, consulting, manufacturing, media and start-ups, which frequently rely on project-based or contract-based hiring. It also ensures that employees moving between fixed-term roles accumulate meaningful exit benefits rather than losing out entirely.

Wages Must Form at least 50 per cent of the Basic.

The new Labour Codes introduce a single definition of “wages,” which includes basic pay, dearness allowance and retaining allowance. Under the new rule, these wages must make up at least 50 per cent of an employee’s total cost-to-company (CTC). If allowances exceed 50 per cent of CTC, the extra amount is added back to wages for PF, gratuity and other benefit calculations. 

This change increases the contribution base for PF and gratuity, strengthening long-term retirement savings. However, it also reduces take-home salary for many employees, because PF and gratuity deductions rise even though the total CTC does not change. This shift encourages long-term financial security but may require workers to adjust to slightly lower monthly in-hand pay.

Changes in Working Hours, Overtime and Leave

The new Codes bring substantial clarity to working hours and leave rules. Weekly working hours are capped at 48, and companies may structure shifts of up to 12 hours per day as long as the weekly total is not exceeded. Any work beyond scheduled hours must be paid at twice the normal wage rate. Leave accrual becomes more favourable under the new OSH Code, with workers earning one day of leave for every 20 days worked. 

The eligibility threshold for annual leave has also been reduced, with employees now qualifying after 180 days of work instead of the earlier 240 days. These changes aim to provide workers with better work–life balance, predictable overtime compensation and improved access to paid leave.

Coverage Expanded to FTEs, Contract Workers and Gig Workers

The new Labour Codes significantly expand coverage to several categories of workers. Fixed-term employees must now receive the same salary, working hours, leave entitlements and many benefits that permanent workers enjoy during their contract period. Contract workers receive stronger protection as well, with the principal employer sharing responsibility for ESIC coverage, workplace safety and certain social-security benefits.

For the first time, gig and platform workers-such as cab drivers, delivery partners and app-based service providers—have been formally recognised under law. Aggregators are required to contribute between 1–2 per cent of annual turnover, capped at 5 per cent of payments made to workers, toward a national welfare fund. These contributions, along with Aadhaar-linked Universal Account Numbers, will help ensure portability of benefits nationwide.

Social Security, PF and ESIC Improvements

The Social Security Code consolidates PF, ESIC, gratuity, maternity benefits and other protections under a single umbrella. ESIC coverage is being expanded to all districts in the country, improving access to subsidised healthcare for millions of workers. A national database of unorganised sector workers is being created, ensuring that social-security benefits can follow workers even when they switch jobs or cities. With EPF currently delivering around 8.25 per cent interest for FY 2024–25, the new structure-where more employees have a higher PF contribution base-helps secure a stronger long-term retirement corpus.

Sector-Specific Benefits Under the New Codes

Several worker groups receive additional protections under the new Labour Codes. Fixed-term employees now receive the same benefits as permanent staff, including social security and medical coverage, along with the reduced one-year gratuity eligibility. 

Gig and platform workers benefit from a legally defined status and a dedicated welfare fund financed by aggregators. Migrant workers are entitled to equal wages, welfare benefits and PDS portability and may claim pending dues for up to three years. Audio-visual and digital media workers will receive appointment letters, timely wages and complete welfare benefits. 

Dock workers gain access to employer-funded annual health check-ups, insurance and medical facilities, while export-sector fixed-term employees are guaranteed appointment letters and PF coverage. 

Workers in mines and hazardous industries benefit from improved safety standards, free annual health check-ups and the treatment of commuting accidents as employment-related incidents. Establishments with over 500 workers must form safety committees to monitor compliance.

Gratuity Example

Gratuity for a Fixed‑Term Employee (1‑Year Rule)

Basic + DA (wages) = Rs 30,000 per month.

Tenure = 2 years as a fixed-term employee in the same company.

A common gratuity formula in practice is around:

Gratuity≈15/26×last drawn wages × years of service

So:

• Last drawn wages = Rs 30,000
• Years of service = 2

15/26 × 30,000 ≈ 17,308

Gratuity ≈ 17,308 × 2 ≈ Rs 34,600 (approx., rounded).

Old regime effect: An Employee with only 2 years on a contract often got Rs 0 because 5 years were required.​

New regime effect: The same 2-year FTE now gets around Rs 34,000+ as a lump sum when exiting.​

Conclusion

The New Labour Codes 2025 represent one of the most significant labour reforms in India’s history. They simplify complex and outdated laws, expand protections to fixed-term, contract and gig workers and create a more predictable system for wages, working hours and social security. While some employees may experience lower take-home pay due to higher PF and gratuity contributions, these changes build a much stronger financial safety net over time. Employers benefit from simplified compliance and workers gain clearer rights, better benefits and improved workplace protections. Together, the Codes aim to shape a more transparent, equitable and secure work environment for India’s evolving workforce.