Actuarial valuation of gratuity, leave and pensions in India

For most companies, yes, although the requirement comes from the accounting standards, not gratuity law. A company under Ind AS 19 or AS 15 measures its gratuity liability actuarially for its year-end accounts, and that includes small and medium-sized companies. Gratuity law generally applies from 10 employees, but a company paying gratuity with fewer still has a liability to measure. Non-company entities classed as MSMEs may use another rational method. See our guide to the applicability of actuarial valuation on gratuity.

Almost always, yes. As our FAQs on funded gratuity schemes explain, funding does not remove the need for a valuation. Under most group gratuity policies, benefits come out of your own fund and any shortfall is yours, so Ind AS 19 and AS 15 still treat the plan as defined benefit. The insurer's fund statement is no substitute: the valuation measures the obligation, and the fund is set against it.

For many employers, yes. The Code on Social Security, 2020, in force since 21 November 2025, bases gratuity on wages as defined in section 2(88): basic pay, dearness allowance and retaining allowance, with any excess of excluded payments (such as HRA and overtime) over half of total remuneration added back. Any increase in the liability is usually past service cost. See our guide to the new gratuity rules.

Yes, pro rata, after one year. The Code on Social Security says only "pro rata"; the one-year condition is in the Industrial Relations Code's definition of fixed-term employment, and the Social Security (Central) Rules, 2026 repeat it. Those rules apply where the Central Government is the appropriate Government, which under the Code's definition includes an establishment with departments or branches in more than one state; elsewhere state rules govern, and not every state has notified them. We value fixed-term staff separately where your data identifies them.

No. The main test is whether unused leave carries forward. Leave that lapses at year end, as most sick leave does, needs no valuation. Earned leave that accumulates usually does, whether it is taken later or paid out as leave encashment, and even if it can never be encashed. The exception is short-term leave: under Ind AS 19, the whole balance is expected to be used or paid within twelve months of the year end; under AS 15, it falls due within those twelve months. You still book a liability for that leave, but without discounting or a valuation. Long-service leave awards need a valuation too. We explain which leave schemes need an actuarial valuation and four common valuation issues.

Under Ind AS 109, the loan starts at fair value, using the market interest rate for a comparable loan to that employee. The gap between the cash lent and that value is an employee benefit under Ind AS 19, usually expensed over the period the employee must serve. Interest income then builds the loan back up. See how employee loans are accounted for and our valuation for a cement company.

An actuarial valuation estimates what a company's promised employee benefits, such as gratuity, leave encashment or a pension, are worth today. An actuary projects the benefit each employee is expected to receive, allows for the chance of leaving, retirement or death, and discounts the part earned by service to date to a present value: the defined benefit obligation. The results, assumptions and disclosures are set out in an actuarial valuation report, which supports the figures in the company's accounts and is reviewed by its auditors.

Usually for year-end accounts: AS 15 and Ind AS 19 require gratuity, pension and long-term leave encashment liabilities to be measured actuarially. An Indian subsidiary may also report to its overseas parent under IAS 19 or US GAAP (ASC 715). Other reasons are setting contributions to a gratuity fund or trust, pricing benefits in a merger or acquisition, and settling them on a wind-up.

We project each employee's benefit under the plan's rules, using assumptions for salary growth, attrition and mortality. We attribute it to service, weight it by probability and discount it to a present value: the liability. The projected unit credit figure below shows the steps for gratuity. The report's disclosures differ between AS 15 and Ind AS 19. Pension reporting and leave accounting raise issues of their own.

Assumptions are the reporting company's responsibility, not the actuary's: our governance framework sets out who owns what. The discount rate comes from government bond yields, and we publish Indian rupee discount rates. Salary escalation and attrition are your own best estimates. Mortality, leave availment and disability matter for some schemes.

The process of actuarial valuation does not end with getting an actuarial report from an actuary. You need to understand the results, validate and challenge them. The auditors must carry out their own assessment of the actuarial report.

By far the most important part of an actuarial report is the exhibit related to ‘reconciliation of Defined Benefit Obligation’. This disclosure presents an analysis of movement of the DBO and is required under most accounting standards. This post explains how to interpret this disclosure in the context of an AS 15 report.