The discount rate is the actuarial assumption with the greatest single impact on the present value of a defined benefit obligation. A change of 50 basis points in the discount rate can move the liability of a mid-sized company by several crores. For this reason, both AS 15 and Ind AS 19 contain specific, mandatory guidance on how the discount rate must be set — it is not a matter of managerial judgment.
The Regulatory Requirement
Para 78 of AS 15 and Para 83 of Ind AS 19 both require the discount rate to be determined by reference to market yields on government bonds at the end of the reporting period. Three requirements flow from this:
- Market yields: The rate must reflect actual market yields, not averaged or smoothed historical yields. It is a point-in-time measure.
- Balance sheet date: The yield is observed at the measurement date — typically 31 March for Indian entities — not an average over the year.
- Consistent term: The maturity of the bond whose yield is used must match the duration of the obligation being valued. See our related article on the term of obligation for a detailed explanation.
In India, high-quality corporate bonds with a sufficiently deep market do not exist across all maturities. As a result, government securities (G-Secs) remain the primary reference for all Ind AS 19 and AS 15 valuations in India.
The Authoritative Source: FBIL and CCIL Yield Curves
The authoritative source for Indian government bond yields is FBIL (Financial Benchmarks India Pvt. Ltd.), a body authorised by the Reserve Bank of India for the valuation of Government Securities. FBIL took over from FIMMDA on 31 March 2018. All regulatory and government entities rely on FBIL rates for G-Sec valuations.
Many actuaries and valuation firms also use the CCIL (Clearing Corporation of India Limited) zero-coupon yield curves, which are derived from G-Secs traded on the National Stock Exchange and have been widely used across the Indian financial services industry for more than a decade. Both sources are acceptable; what matters is that the actuary uses a recognised, market-derived yield curve — not informal online quotes or broker indications.
Responsibility for Setting the Discount Rate
A point that is often misunderstood: while the actuary computes the discount rate and includes it in the valuation, the ultimate responsibility for actuarial assumptions rests with the Board of Directors of the reporting enterprise — not the actuary. The Board may delegate this responsibility to management, but accountability remains at the Board level. The actuary provides expertise and analysis; the Board adopts the assumptions.
In practice, most companies defer to the actuary's recommendation, and auditors scrutinise whether the discount rate is consistent with observable market yields. An unjustified deviation from the published G-Sec yield will typically result in an audit finding.
Common Errors and Misconceptions
| Error | Why It Is Wrong |
|---|---|
| Using a "generic" rate of 7% or 7.5% without reference to the yield curve | Rate must be derived from actual market yields at the specific balance sheet date, matched to the obligation's duration. |
| Using the expected return on plan assets as the discount rate | Under Ind AS 19, the expected return on assets is set equal to the discount rate — not the other way around. |
| Reusing last year's discount rate | The rate must be re-determined at each balance sheet date. Yield curves move year to year. |
| Using a 10-year bond yield for an obligation with 14-year duration | The yield must match the specific duration of the obligation. On a steeply sloped curve, this can matter by 20–40 bps. |
| Relying on informal online quotes (Bloomberg, Reuters, Investing.com) | These are informational only and are not authorised valuation sources under RBI regulations. Use FBIL/CCIL data. |
Impact of the Discount Rate on the Valuation
The relationship between the discount rate and the defined benefit obligation is inverse: a higher rate produces a lower liability, and a lower rate produces a higher liability. The sensitivity is roughly equal to the Duration of the obligation — for an obligation with Duration of 12, a 50 bps increase in the discount rate reduces the DBO by approximately 6%. For a company with a gross gratuity obligation of ₹10 crore, this translates to a ₹60 lakh movement in the balance sheet. This scale makes careful rate selection essential, not merely technical.
What Should You Do?
- Ask your actuary to disclose the exact yield curve source used, the maturity at which the yield was read, and the duration of the obligation — all three should be consistent and documented.
- For 31 March 2026 valuations, be prepared for higher long-term discount rates compared to prior years, due to the bear-steepening of the yield curve. This may produce actuarial gains, particularly on longer-duration plans.
- Verify that the actuary has used FBIL or CCIL published rates, not informal market quotes. Auditors will ask.