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Gratuity Valuation

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By Certified Actuary

Compliance with Accounting Standard

Automation of models

In India, Gratuity benefits are payable as per Payment of Gratuity Act, 1972. The Act defines the level of benefits payable to an employee.

As per Payment of Gratuity Act, 1972, Gratuity payment is payable to an employee only after completion of 5 years of continuous service at the time of termination, resignation, or retirement.

Gratuity is payable to an employee before completing 5 years only in case of death or permanent disablement.
Gratuity amount is Non-taxable up to INR 20,00,000. Any amount above INR 20,00,000 is taxable under Section 10(10) of the Income Tax Act.
The purpose of the Gratuity valuation is to keep appropriate liability in the Balance sheet of the Company and expense can be booked in the Profit & Loss account. Large organisations get the valuation done on quarterly/monthly basis. Small and medium size entities get the gratuity valuation done at least once in a year as per AS 15 R or IND AS 19 accounting standard.
Gratuity valuation is critical and important to ensure that the employer keep sufficient fund to pay off the liabilities. This is also a way to boost employees’ confidence.

Gratuity Valuation

Following are the 4 pillars to do Actuarial Valuation of Gratuity Benefits:

Data

The goal is to transform the data into information and information into insight. The data needed for actuarial valuation is mostly Employee data related to salaries, Date of Joining, Date of Birth and benefit structure. There are some basic checks we always perform to ensure whether the data we use is reliable or not.

Number Analysis

Once the inputs to the model are set (Data and Assumptions), the nect task is to analysis of the obtained results. The figures we need to analyze are the liability and expense numbers. They should be consistent with the accrued liability as well as with previous year’s results.

Actuarial Assumptions

Results obtained from an Actuarial Valuation are nothing but a proper blend of assumptions. More valid the assumptions, more reliable the results. The assumptions we use for calculating the liability is based on the past experiences and future expectations by the company (Attrition rate and Salary Growth rate). When there is less evidence of past and future experiences an industry average can be used for ascertaining liabilities.

Disclosures in the report

The best way to make someone believe in our work is to make it presentable and easy to understand numbers as per prescribed disclosure formats as mentioned in Actuarial practice standard or accounting standard.

In India, the standard formula to calculate gratuity is: Monthly Salary × Number of years of employment (rounded to nearest year) × 15/26 Generally, Monthly Basic + D.A. salary is considered for gratuity valuation.

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Advantages of Employer Employee Benefit Valuation

  • Indian Accounting Standard requires actuarial liability to be recognized and booked in the Balance sheet.
  • Estimation of the expense to Profit & Loss account and Other Comprehensive
    Income (OCI) related to actuarial valuation for the current year.
  • Calculation of the estimated expenditure for the following financial year can be used for budgetary and interim reporting purposes.
  • The level of funds required to back your employee benefit liabilities helps to keep sufficient funds to pay-off on time.
  • Recognizing gratuity liability or any other employee specific liability in books boost
    Employees confidence.

Precision; Accuracy; Expertise

  • At Mithras Consultants, we understand the importance of gratuity valuation for businesses. Our team of experts uses their knowledge and expertise to provide accurate and reliable gratuity valuation services to our clients. We work closely with our clients to ensure that their gratuity obligations are met in a timely and cost-effective manner.

    Here’s how we provide value to our clients:

    Accurate Gratuity Valuation: Our team of experts uses actuarial science and mathematical calculations to provide accurate gratuity valuation services. We take into account all the relevant factors, such as the employee’s length of service, last drawn salary, and expected rate of return, to determine the present value of the gratuity liability.

    Compliance with Regulations: We ensure that our gratuity valuation services comply with all relevant regulations and guidelines. We keep ourselves updated with the latest regulatory changes to ensure that our clients are always in compliance with the law.

    Timely Service: We understand that gratuity obligations are time-sensitive and require prompt action. We work closely with our clients to ensure that their gratuity obligations are met in a timely manner, without any delays.

    Cost-Effective Solutions: We provide cost-effective actuarial valuation of gratuity to our clients. Our team of experts works closely with our clients to find the most efficient solutions that meet their gratuity obligations while keeping the costs low.

    Expert Advice: Our team of experts provides expert advice on gratuity valuation and related matters. We work closely with our clients to understand their unique needs and provide customized solutions that best suit their business requirements.

    We pride ourselves on providing reliable and accurate gratuity valuation services to our clients. Our team of experts is committed to delivering exceptional value to our clients and ensuring that their gratuity obligations are met in a timely and cost-effective manner. Mithras Consultants is the best choice for businesses and organizations seeking accurate and reliable actuarial valuation services. Contact us today to learn more about our actuarial valuation services and how we can help you manage your risks and make informed decisions.

Our Valuation Process

01

Collecting the data shared by the client for the Actuarial Valuation.

02

data checks are applied for data completeness and data consistency.

03

Company provides the Actuarial assumptions for valuation salary escalation rate, Attrition rate and retirement Age.

04

Assumptions are verified for appropriateness and compared it with company's recent experience.

05

Performing Actuarial valuation using prescribed methodology and agreed assumptions.

06

Analysis of numbers is done to figure out the reasons of movement in liability.

07

A full AS15(Revised) / IND AS 19 report per entity that can be used by your auditors will be shared and all auditors' queries shall be addressed and resolved.

08

After Confirmation from the client, signed report will be shared with the client.

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FAQ'S

The Gratuity Act 1972, describes that the gratuity is payable to an employee after completing 5 years of vesting period in case of resignation, termination or retirement. However, the provision shall be done as per the accounting standard even if the Company has not completed 5 years of operations. As per Para 72 of Ind AS 19/ Para 70 of AS 15, Gratuity Provision shall be made even for service of less than 5 years.
Payment of Gratuity Act applies to your company if you have more than 10 employees. All companies having 10+Employees need to make Provision for Gratuity as per Actuarial Valuation method Projected Unit credit method (PUCM) to comply with AS15/ Ind AS19.
No, the actuarial valuation is not required for short-term benefits. In case, the benefit paid after 12 months, the actuarial valuation is needed as per AS 15 R / IND AS 19 accounting standard.
For SMC, the actuarial valuation is required but detailed disclosures are exempted.
Para 78 of AS 15 states that the rate used to discount post-employment benefit obligations (both funded and unfunded) should be determined by reference to market yields at the balance sheet date on government bonds. Similarly, IND AS 19 also prescribe to refer government bond yield to set discount rate. In order to set the discount rate, its critical to keep currency and term of the bonds to be consistent with liability duration.
In India, currently there are no regulations to keep fund to back the gratuity provision calculated by an Actuary. However, it is always encouraged to keep fund in order to pay off liabilities on time and to avoid/reduce interest rate and reinvestment risk. Further, there are tax advantages for funding.
There are three key factors which shall be considered to set attrition assumption: a) Company’s recent attrition experience in last 2-3 years b) Industry experience of employee attrition c) Management view on future attrition
Even if the plan is funded and managed by an Insurance Company, still the Company need to get a separate actuarial valuation done. The reason being that an insurance company does not provide complete disclosures as required by accounting standard regulations and sometimes the assumptions are not fair and inconsistent with Company’s own experience.

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