Gratuity: Frequently Asked Questions

Under the Payment of Gratuity Act, 1972, an employee becomes eligible for gratuity after completing five years of continuous service with the same employer. This five-year threshold applies upon resignation, termination, or superannuation.

Two important exceptions exist. First, in case of death or permanent disablement, gratuity is payable regardless of the number of years served — even if the employee has been with the organisation for only a few months. Second, for seasonal establishments, the vesting period is three years of continuous service.

Note that the Labour Codes, which became effective on 21 November 2025, introduced a key change for fixed-term contract employees: gratuity is now payable on completion of the contract period, with the vesting period reduced to one year for such employees. This applies regardless of whether the contract period is less than five years.

This depends on the nature of the engagement. Fixed-term contract employees engaged directly by the principal employer are explicitly covered under the new Labour Codes (effective November 2025). For such employees, the vesting period is one year of service under the contract.

For employees engaged through a contractor or manpower agency, the statutory liability ordinarily rests with the contractor. The principal employer is not directly liable to pay gratuity to contract labour, provided the contractor fulfils the statutory obligation independently.

However, companies should review the specific terms of their contractor agreements. In many cases, contractual clauses or historical practices may have created an economic exposure for the principal employer that should be recognised in financial statements even if not a strict statutory obligation.

The Act applies to every factory, mine, oilfield, plantation, port, and railway company, and to every shop or establishment with ten or more employees. Once a company reaches the ten-employee threshold, it remains covered even if the headcount subsequently falls below ten.

In the states of Andhra Pradesh (2011), Telangana (2016), and Karnataka (2024), Section 4A of the Act has been notified, making it mandatory for private establishments to obtain compulsory gratuity insurance under an approved gratuity fund.

Yes, unequivocally. This is one of the most common misconceptions we encounter. Under Para 72 of Ind AS 19 and Para 70 of AS 15, the obligation must be recognised as service is rendered — not only after the five-year vesting period has elapsed.

The five-year vesting condition affects the probability of a payment being made, not the recognition of the liability itself. The actuary accounts for this by applying attrition assumptions: employees who are likely to leave before completing five years reduce the projected benefit obligation proportionately. However, excluding them from the data entirely would produce an understated and non-compliant liability.

In practical terms: if you have a new business that has been operating for three years, you still need an actuarial valuation of your gratuity liability for all employees currently on payroll.

The contribution to a gratuity fund should, at a minimum, be sufficient to keep the fund solvent — i.e., the fund corpus should be adequate to meet all expected near-term gratuity payments, and the fund should be on a trajectory to meet long-term obligations as they crystallise.

Actuarially, the recommended contribution is derived from the actuarially determined contribution rate, which takes into account the present value of the defined benefit obligation, the current value of plan assets, the projected benefit accrual in the coming year, and expected investment returns.

From a tax perspective, contributions to an approved gratuity fund are deductible under Section 36(1)(v) of the Income Tax Act, subject to a ceiling linked to the actuarially certified liability. Contributions in excess of the actuarial valuation are not deductible. We therefore recommend having your actuary prepare a separate funding advice alongside the accounting valuation.

Note: the accounting valuation (for Ind AS 19 / AS 15 purposes) and the funding valuation (for income tax deductibility and fund management) are two distinct exercises, though they draw on the same underlying data.

Yes. An insurer's Group Gratuity statement confirms the surrender value of the policy and the premiums paid. It does not constitute a compliant actuarial valuation under AS 15 or Ind AS 19.

Both standards require the liability to be measured using the Projected Unit Credit Method (PUCM), with assumptions for salary escalation, attrition, mortality, and a discount rate derived from government bond yields.

Yes — the Labour Codes, effective 21 November 2025, constitute a plan amendment under accounting standards. The primary impact is on the definition of wages used to compute gratuity. The Code on Wages requires that wages forming the basis for gratuity calculation must be at least 50% of total remunaration. Companies with low basic salary structures (basic being 30–40% of CTC) will see a meaningful increase in their gratuity liability.

The accounting treatment differs between standards. Under Ind AS 19, the entire increase in liability arising from the plan amendment must be recognised immediately in the P&L as a Past Service Cost. Under AS 15, the increase is split between vested employees (recognised immediately) and unvested employees (amortised over the average remaining vesting period).

Any actuarial valuation with a measurement date on or after 21 November 2025 — including your March 31, 2026 year-end valuation — must incorporate these changes.

The gross obligation (Present Value of Defined Benefit Obligation, or PVDBO) represents the full actuarial value of gratuity payable to all employees, projected to their expected exit dates and discounted to the balance sheet date.

If the company maintains an approved gratuity fund (through LIC, a trust fund, or another insurer), the Fair Value of Plan Assets (FVPA) is offset against the gross obligation. The amount reported on the balance sheet is the net liability: PVDBO minus FVPA.

For unfunded plans — where no separate fund exists — the entire PVDBO is the balance sheet liability. Companies with unfunded gratuity plans typically carry a larger net liability, and their annual P&L charge also tends to be higher because there is no asset return to offset the interest cost.

Schedule III of the Companies Act, 2013 requires companies to bifurcate provisions into current and non-current portions. For gratuity, the current portion represents the amount expected to be paid within the next twelve months — based on projected exits from death, retirement, and attrition assumptions — while the remainder is classified as non-current.

For funded plans, the current portion is typically the contribution expected to be made to the fund over the next twelve months, informed by the funding policy and minimum contribution requirements. Your actuary will disclose the current and non-current split as a standard part of the valuation report.