Frequently Asked Questions about gratuity funding

Posted by Anuradha Sehgal on 19-Jun-2017 10:30:00

The topic of funding of gratuity scheme remains unclear for many companies, due to a lack of regulatory framework and a general lack of understanding of actuarial principles. 

We have examined the issue to consider for gratuity scheme funding in our prior postThis post sets out a list of frequently asked questions, from our own experience working with our clients:

1. My company's gratuity scheme is funded with LIC. Do we still need to get the actuarial valuation done for AS 15?

Yes, the fact that your gratuity is funded doesn't change anything as far as reporting under AS 15 is concerned. AS 15 is an assessment of your gratuity liabilities and how much you hold in assets to back them.

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Topics: Actuarial valuation, Gratuity valuation, Funding, Funding valuation

3 issues to understand about insurer-managed gratuity funds

Posted by Nasrat Kamal on 15-Jun-2017 09:19:00

Many employers choose to fund their gratuity liabilities by paying regular contributions to an insurance company. However, employers often do not fully understand what to expect from these arrangements.

A significant proportion of Indian companies set aside funds with an external fund manager, mostly an insurance company like the LIC, to pay out gratuity benefits payable to their employees in future. There are three issues to understand about this arrangement:

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Topics: Actuarial valuation, Gratuity valuation, Funding, Funding valuation

5 issues to consider for Gratuity scheme funding

Posted by Nasrat Kamal on 25-Apr-2017 10:10:00

Under the right circumstances, a decision to set aside funds to back a gratuity scheme could deliver significant benefits to the companies.

Gratuity is a statutory benefit - employers are required to pay a lumpsum benefit to their employees who have served for at least five years. The lumpsum is generally calculated as 15 days of eligible salary for each year of service.

Unlike certain other benefits like salaries, bonuses and life insurance, an employee receives gratuity only at the exit from the company and not while in service.

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Topics: Employee benefits, Actuarial valuation, Gratuity valuation, Funding

Increase in gratuity limit and the impact on gratuity valuation

Posted by Nasrat Kamal on 13-Mar-2017 09:45:00

The Government of India is all set to increase the maximum limit of gratuity to ₹20 lakhs. Companies reporting under Ind AS 19 will be affected more than those reporting under AS 15.

But first, we need to be clear about what is actually going to change. A formal notification on the matter is yet to be released. However, the media reports suggest that the 'gratuity limit' on gratuity for private sector employees to ₹20 lakhs.

The increase in gratuity limit as reported by the media can have two possible interpretations:

1. The amount of maximum gratuity payable under the Payment of Gratuity (PG) Act, which is currently capped at ₹10 lakhs will increase to ₹20 lakhs. This would lead to an increase in the liability and P&L expense of the affected companies.

2. The second interpretation is that the amount of gratuity that can be taken 'tax-free' by employees, which is also capped at ₹10 lakhs, will increase to ₹20 lakhs. Many media reports are referring to this 'tax-free' limit, but this interpretation seems less likely. If we go by this interpretation, there will be no impact on the gratuity liability.

Rest of this post is based on the first interpretation.

Payment of Gratuity Act 1972

Currently, the Payment of Gratuity Act 1972 ('PG Act') prescribes that a lump sum gratuity be provided to any employee who resigns, dies or retires from the company after completing about five (5) years of continuous service. 

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Topics: Employee benefits, Actuarial valuation, Compensation and benefits, Gratuity valuation, Regulatory update

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