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In India, the Payment of Gratuity Act, 1972 (Act) requires entities with ten or more employees to pay gratuity benefit to their employees at the time of termination of employment. The act also provides that if an entity is covered under the act because its number of employees exceeded ten on a particular day, it will continue to be covered under the act even if its number of employees fall below ten subsequently. However, no gratuity is payable to an employee, which terminates its services to the entity before completing five years of service, if such termination is not due to death or disablement. Further, the act does not apply to arrangements, which do not constitute an employer-employee relationship or to employees of the central/state governments governed by separate rules framed by the government.

According to the act, gratuity payable to an employee is calculated by using the formula given below:

Last monthly salary x 15 days x completed years of service
plus part thereof exceeding six months_______

26 days

If gratuity computed as per the formula above exceeded Rs. 350,000, the entity had an option to limit maximum gratuity payable to each employee to Rs. 350,000. In practice, many entities have capped gratuity payable to their employees at the amount fixed under the act.

Recent developments

The Government has notified the Payment of Gratuity (Amendment) Act 2010 in May 2010. This bill to this amendment was approved by the Cabinet before 31 March 2010. The amendment raises the ceiling on gratuity payable to employees from the existing Rs. 350,000 to Rs. 1,000,000.

Financial reporting impact

The enactment of this amendment will require entities, which have fixed their maximum gratuity liability at the ceiling laid down in the act, to pay higher gratuity to their employees. We believe that the proposed amendment will give rise to the timing issue as to in which period the provision is required. Given below is our perspective on this issue.

Should the proposed change in the limit be considered in determining gratuity liability as at 31 March 2010?

Gratuity liability is covered under scope of AS 15 Employee Benefits and is treated as a defined benefit plan. According to AS 15, the provision for a defined benefit plan is calculated using the projected unit credit method (PUCM) of actuarial valuation. The application of PUCM requires an entity to make various financial assumptions such as future salary increases and changes in benefit levels. Consequently, the proposed change in the gratuity limit should also be considered for determining defined benefit liability as at 31 March 2010. It does not matter if the bill was an act at the reporting period date, as long as there is reasonable certainty that the law would be passed.

Appropriate disclosures should be made with regards to the above in the notes to the financial statements.

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  1. M R K Sarma says:

    Hi I’ve retired from Army in the year 1986, and I got a gratuity of 35,000 as per the then gratuity calculations. And after that I took a VRS from Indian Bank in the month of Jan 2010, through which I was entitled a Gratuity of 3.50.
    Which seems perfectly fine, however in between, since I joined a banking organization amid few gratuity act changes, where recently for the ex- service men after Kargil were given an exemption in gratuity entitlement and paid the current amount of 3.50laks , rather then the previous slab in which they fall under.
    Taking this into consideration, will I be able to request for the current (the then entitlement of 3.50 lakhs) as I continued service after retirement??

  2. shantanu says:

    i want to know that i served lic 4years and 9months(31-07-2011) from the date of joining i.e. an apprentice probation starts from iwant to switch in this condition if i m eligible for gratuity payment or not.please help me.

  3. Raghuram says:

    Is there any recent amendment exempting applicability of Gratuity Act for BPO / KPO……or any other sector / industry. If so, pls do let us know.
    Would appreciate if the response could be sent across to my mail id (mentioned above)

  4. KULDIP says:

    I served in a Central Police Organisation as Class one officer for 7 years. But due to my family problem I resigned on domestic ground and joined a PSU(Without intimating my parent organisation). My resignation was accepted without pensionery benefit.
    Please clarify following things
    1. Am I eligible for gratuity.
    2. Is gratuity a part of pension
    Thanking you

  5. AJAY LONDHEY says:

    Dear Sir,

    Following is mentioned as above

    Last monthly salary x 15 days x completed years of service
    _______plus part thereof exceeding six months_______

    26 days

    Does this means that for calculations of Gratuity Basic Salary shouldnot be considered as earlier?


  6. T V SRIDHAR says:

    I have worked with a reputed Public Sector insurer from October 1980 to July 2007. I took VRS on 10.7.2007.

    Please confirm me whether I will be benefited from the amendment date and if so, what is the document, I need to substantiate my eligibility

  7. kabali says:

    Is there any developement on this? Is the finance department note released? I am the one who retired on 31st March and is there a chance that the revision will be applicable. Why the Government should be so strict with Private employees when they gave it to Government employees with retrospect?

  8. KA Salian says:

    Does this mean that in the books of accounts per 31.3.2010, provision for gratuity amount should be created based on the revised limit of Rs:10.0 lacs for all the employees on roll as on 31.3.2010? If this is true, what stops an entity to create the liability for the employees retired between 1.1.2006 to 30.3.2010? This is logical because the government wanted to brigh parity and the banefit to emoplyees in government sector was given retrospectively from 1.1.2006

  9. m jagadish says:

    pl clarify regarding income tax exemption for the increased amount of 6.5 lakhs since tax exemption is provided for 3.5 lakhs

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