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Group Coverage

Group Gratuity

A funded scheme for the gratuity liability that the Code on Social Security, 2020 places on employers. The liability accrues every year whether or not it is funded; a scheme turns an unpredictable lump sum on each exit into a planned annual contribution, backed by actuarial valuation and recognised for accounting under Ind AS 19.

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Coverage at a Glance
Statutory Liability

Code on Social Security, 2020 obligation

Actuarial Valuation

Annual valuation of the accrued liability

Ind AS 19

Recognition and disclosure in the accounts

Funded Contribution

A planned annual cost instead of lump sums

1972Act Liability
ActuarialValuation
Ind AS 19Aligned
FundedScheme
Coverage

What a group gratuity scheme does

Gratuity is a statutory obligation under the Payment of Gratuity Act. A funded scheme turns an unpredictable liability on the balance sheet into a planned annual contribution.

Funds a liability you already owe
The obligation exists whether or not it is funded. A scheme puts money aside against it, so a cluster of retirements or exits does not have to be met out of working capital in the month it happens.
Actuarially valued each year
An actuary values the liability from employee data and the assumptions on salary growth, attrition and discount rate. The valuation is the centre of the arrangement rather than a supporting document.
Held in an approved trust
The scheme is normally set up under an approved gratuity trust, with trustees appointed and a deed executed. Approval is what makes the tax treatment available, and it takes time to obtain.
Investment of the fund
Contributions are invested by the insurer under the scheme rules. Different insurers offer different fund options and guarantees, and the difference between them compounds over the life of the scheme.
A life cover option
Many schemes can carry a term assurance element so that an employee who dies in service leaves the family the gratuity that would have accrued to retirement, not only what has accrued to date.
Payment on exit
Benefits are paid on retirement, resignation after the qualifying service, death or disablement, in line with the Act and the scheme rules.
Advisory approach

A funding decision first, an insurance decision second

Most employers meet gratuity out of cash when it falls due and treat the accounting provision as the whole of the exercise. That works until several long-serving people leave in the same year, which for a business that grew in a burst fifteen years ago is not a remote possibility but a scheduled one.

The questions worth asking are whether the liability is valued at all, whether an approved trust exists, and what the fund is earning against what the liability is growing at. Those three answers decide whether a scheme is worth setting up, and they are answers an actuary and an accountant give jointly. We will say plainly where the honest answer is that the existing arrangement is adequate.

Tax treatment is a matter for your auditor and we do not advise on it. What we do is place and compare the insured scheme, and set out the differences between insurers on fund options, charges and the service you will actually receive when a payment is due.

FAQ

Common Questions

The gratuity obligation is statutory under the Payment of Gratuity Act. Funding it through an insured scheme is not compulsory, and many employers pay from cash flow. Funding is a decision about predictability and about the balance sheet rather than about compliance.
Employee data: date of birth, date of joining and current salary for each person, together with the scheme rules. From that they value the accrued liability and the annual service cost.
Usually yes. The trust continues and the fund is transferred, subject to the deed and to the outgoing insurer's terms. It is worth comparing at renewal rather than leaving a scheme in place because moving looks like work.
No gratuity is payable under the Act, and the amount stays in the fund and reduces future contributions. The scheme is a pooled fund against the employer's obligation, not an individual account per employee.
Only if the life cover option is taken. Without it, a death in service pays the gratuity accrued to that date. With it, the benefit can be brought up to what would have accrued had the employee served to retirement, which for a young employee is a very large difference.
Employee data with dates of birth, dates of joining and current salaries, whether a gratuity trust already exists, and the actuarial valuation report if one has been done.