Gratuity Insurance and Actuarial Services

Fri 15 Jun 2018 00:00:00 UTC

Gratuity insurance

Gratuity Insurance and Valuation Services

Gratuity is a compulsory long term employee benefit that is offered by the company as per the Gratuity act, 1972. It is a benefit that is accrued over the period of service of an employee and is paid to the employee upon death or leaving the service. There are certain formalities and processes associated with gratuity, and certain insurance solutions a company can take to simplify their gratuity requirements.

What is Gratuity?

Gratuity is a sum of money paid by an employer to employees who complete 5 or more years with the company. Gratuity is also paid out if the employee loses his life while working for the company(to the legal heir) or if the employee suffers a disability that results in him being unable to work anymore.

It can be understood as a form of thank you, or tip paid by employer to the employee for services offered to the company. Various Countries have varying limits on gratuity. The amounts payable vary per company. In india, the legally required amount is


    Where, N is number of years served in the company
          S is monthly basic salary plus dearness allowance

An employee cannot receive gratuity of more than INR 10 lakh.

In India, the following types of companies must have a gratuity plan in place:

  1. Listed companies on any stock exchange in India
  2. Banks/FIs/Insurance companies
  3. Companies having turnover of more than 50 Crores
  4. Companies having borrowings or deposits of more than 10 Crores
  5. Companies employing more than 50 employees
  6. Holding or subsidiary company of any of the above

Indian GAAP(Generally Accepted Accounting Principles) mandate that a liability is recorded in the financial statements in respect of employee benefit schemes in accordance with AS 15 or Ind AS 19, as applicable. These accounting standards require that you perform an actuarial valuation to estimate the liability and make other disclosures as required by the accounting standard. If your company is an India based subsidiary of an international parent, then you may be required to report under the GAAP applicable to the parent company. Depending on where the parent company is located, you may need to report under US GAAP (ASC 715), IAS 19 or FRS 17.

What should a company do to manage gratuity?

A company must do two things:

  1. Do an actuarial valuation to estimate the total liability that the company will face. This is known as an AS-15 form, something that HAS to be stamped by a certified actuary, an auditor or accountant cannot do it.
  2. Maintain the reserves required as per the AS-15, to manage the money to ensure you can pay gratuity. This can be done through an insurance product or on your own.
Actuarial Valuation of Gratuity:

A company can approach an actuary and get a formal valuation done. The purpose of the valuation is to estimate the 'Present value' of the expected outgo of the payments that the company will make over the course of the year. The actuarial valuation will also include an extended disclosures in the form of an actuarial report.

Actuaries arrive at the value of liability after taking stock of your company and its employee profiles and then making relevant actuarial assumptions. There are many types of employee benefits liabilities that may need an actuarial valuation, apart from gratuity:

  • Actuarial valuation of Gratuity Liabilities
  • Actuarial valuation of Leave encashment Liabilities
  • Actuarial valuation of earned leave/ leave benefits
  • Actuarial valuation of sick leave benefits
  • Actuarial valuation of Pension benefits
  • Actuarial valuation of Interest rate guarantee for provident fund
  • Actuarial valuation of Long Term Care
  • Actuarial valuation of Long term service awards
  • Any other defined benefits plan
Taking a Gratuity Insurance Product:

Optionally, you can choose to have an IRDA licensed insurer manage the money by taking a gratuity insurance product. The product can be unit-linked, where the money is invested in funds that the company can choose, or a strictly endowment based plan, where the returns are defined at the beginning of the term. The insurance product provides the following benefits:

  1. Management of money - Company does not have to do any active money management. Insurers have separate teams that will help in investing the money, into various funds.
  2. Claims handling - The insurer in the picture will help the company w.r.t claims
  3. Tax benefits - Premiums paid can be claimed as tax exemptions


  1. Company does not have to do any active money management of the gratuity fund
  2. Tax benefits - Gratuity product is tax deductible and thus reduces the tax payable


  1. Fund management charges may not be to your liking.

At Perilwise, we have a comprehensive gratuity plan. We combine:

  1. In-house expertise and an experienced panel of consulting actuaries to help you complete your actuarial formalities
  2. Tie-ups with leading insurers and RIAs to help you get the best returns for your money
  3. A policy manager dashboard that allows you to manage this for your employees with one click

Into a holistic offering for gratuity and other employee benefits.