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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