Gratuity Provision

Under the right circumstances a decision for finding the right gratuity provision is a win-win situation for the company as well as for the employees. Now the question arises is “what is gratuity?” So gratuity is a benefit that a company has to give to the employees who have served for a minimum of 5 years in the company. This amount is calculated as 15 days of eligible salary for each year of service. Unlike other benefits like salary, bonus and life insurance, an employee receives gratuity only when he/she leaves the company. They will not get gratuity provision at the time of service. Gratuity Provision is led by payment of Gratuity Act 1972. Read more about AS15 R (Accounting Standard 15 Revised)

In this post we will discuss whether we should fund a gratuity scheme or not. Gratuity Provision is very useful for the Employees.


Companies need to mention the liabilities in their financial statements In respect to gratuity accrued to their employees. Equatorial valuation as per the provisions of AS 15 or Ind AS 19 gives Liability. IND AS 19 Though a liability is record in the financial statements, and currently companies are not require to set aside funds to back these liabilities. Also there are many companies that run on ‘unfunded’ gratuity assets where there are no backing assets. A scheme where funds have been set aside is known as a ‘funded’ scheme. 

Companies have a choice to set aside funds to back their gratuity liabilities. Currently in India it does not prescribe the amount of funds to be maintain and companies can choose to maintain a level of funding that they are comfortable with. Companies have a right to choose the amount of contributions they want to make into the fund. Actuarial gratuity is totally independent of the funding issues, such as solvency, target assets and contributions. The ESOP Structure

Issues Regarding Funding of a Gratuity Scheme 

Below are some important generic issues which would be applicable to most companies contemplating funding their gratuity schemes.

1. Tax Benefits 

From an employee’s point of view there are basically three types of tax benefits if gratuity scheme gets fund: 

  • Annually, an amount equal to 8.33% of basic salaries will be pay to the gratuity fund as a tax deductible expense. 
  • If the gratuity liabilities are pay for the first time, a contribution of 8.33% for each year of past service of an employee can be pay into the gratuity fund as a tax-deductible expense. Lets read more about  LEAVE ENCASHMENT VALUATION
  • Interest or investment income earned during the gratuity is also tax free. 

2. Opportunity Cost 

For funding gratuity liabilities, companies will need to find the cash within the business and commit a gratuity trust. But the most important considerations would be the alternative ways that cash could be put to use and the return that cash would generate and for how long.

3. Liquidity Management 

If the liabilities are unfunded then the company needs to pay the gratuity when the employee will leave the company. Therefore, the amount company would pay could vary gently from year to year as the number of people leaving will be uncertain. This would be only a concern for the small or midsize companies. As there the resignation of few senior employees, with high salary and service could get a cash flow position. And, if the scheme is funded the fund will build up during the years when no major payouts are paid and then used when large payoffs are required to be paid.


Ultimately the decision to fund will depend on how important the above factors are for the company. You can take the best funds and schemes from Mithras Consultants as we give you the best of all.

Also Read: Actuarial Valuation of Gratuity IND AS 19  Gratuity Valuation AS15 R (Accounting Standard 15 Revised)

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