1. Gratuity Benefit Ceiling - Increase to Rs
Gratuity Benefit Ceiling - Increase to Rs.20 Lakhs - Impacts & Considerations
11 August 2017
R Arunachalam
Consulting Actuary 1

2. Background
Gratuity Benefits Ceiling is proposed to be raised to Rs.20 Lakhs
7th Pay Commission for Government Sector
Amendment of Payment of Gratuity Act – Section 4 (3) – on the cards
To benefit Private Sector
Impacts the Measurement of Benefit Obligation 2

3. Gratuity Benefit Formula: 15 / 26 x Past Service x Salary at Exit
Current Ceiling
Rs.10,00,000
Proposed Ceiling
Rs.20,00,000
Impacts Benefits to be paid when the amount as per Formula crosses current ceiling
Additional cost for employer and hence additional obligation 3

4. Measurement of Obligation
Actuarial Valuation Method
Attribution of Benefits
Actuarial Assumptions 4

5. Attribution of Benefits
Periods of Service (render services in return for benefits)
Accrued Service: Past Service as on Valuation Date
Benefit Paid is based on Salary at Exit; and there is a ceiling
Attributed Benefit for Each Year of Accrued Service
Accrued Service x Attributed Benefit 5

6. Attribution of Benefits
Employees never crossing the ceiling
Employees crossing the ceiling before normal retirement
Employees who have already crossed the ceiling 6

7. Ind AS 19 – Paragraph 73 – Straight Line
Current Service 25 Years; Current Salary Rs.60,000 per month
Salary 20% p.a. 7

8. Measurement of Obligation
Actuarial Valuation Method: Projected Unit Credit Method
Attribution of Benefits: Straight Line with cut off when ceiling crosses as per Paragraph 73
Demographic Assumptions – Mortality & Attrition Rate to be applied on attributed benefit for each year of service
Financial Assumptions – Discount Rate to be applied on the resulting expected cash flows 8

9. Attribution of Benefits
Periods of Service (render services in return for benefits)
Salary at Exit; however only for cut off
Demographic Assumptions – Mortality & Attrition Rate to be applied on attributed benefit for each year of service
Financial Assumptions – Discount Rate to be applied on the resulting expected cash flows 9

10. Impact 10

11. Considerations Past Service Current Salary Salary Escalation Rate
Attrition Rate 11

12. Considerations Past Service Cost – Recalculate on Opening Date
Current Service Cost – Recalculate on Opening Date
Unvested Benefits under AS 15 (revised 2005) 12

13. Considerations
Employees who have not crossed ceiling leaving during the year
Actuarial Gains if the Demographic Assumptions Holds Good! 13

14. Thank You!
The opinions and views expressed in the above slides are personal and does not represent my client or institution to which I belong to 14