Gratuity is one of the most universal employee benefits in India — almost every organisation with more than ten employees ends up dealing with it in some form. Yet the accounting for it looks quite different depending on which reporting standard applies to your company. This post walks through how a gratuity plan actually works, which standard — AS 15 (Revised) or Ind AS 19 — applies to you, where the two standards genuinely differ, and where they don’t.
How a Gratuity Plan Works
A gratuity plan is an employee benefit plan under which an employer pays a lump-sum amount to an employee when they become eligible — usually on retirement, resignation, termination, or death — subject to the plan’s (and the law’s) eligibility conditions.
Eligibility. Under the Payment of Gratuity Act, 1972, gratuity is payable on retirement, resignation, death, or disablement after 5 years of continuous service. The 5-year rule is waived in case of death or disablement.
Statutory formula. The amount payable is:
15 / 26 × Last Drawn Salary × Completed Years of Service
subject to a statutory ceiling under the Act, currently ₹20 lakh (this ceiling has been revised upward periodically — most recently in 2018 — and is worth rechecking at the time you’re reading this, since it’s occasionally debated in Parliament).
Worked example: Consider an employee who retires after 22 years of continuous service with a last-drawn basic-plus-DA of ₹75,000 a month. Gratuity payable works out to:
15 / 26 × ₹75,000 × 22 = ₹9,51,923
Since this is comfortably under the ₹20 lakh statutory ceiling, the full amount is payable.
Funding route. A gratuity plan may be funded through an approved gratuity trust or a group insurance policy, or it may be left unfunded and paid directly from the employer’s own resources as and when obligations fall due. Funded or not, the accounting obligation is the same — only the balance sheet presentation of plan assets differs.
Which Standard Applies to You
Whether a company follows AS 15 (Revised) or Ind AS 19 depends on its listing status and net worth, per the phased roadmap under the Companies (Indian Accounting Standards) Rules:
| Entity Type | Net Worth | Ind AS 19 Applicable? |
|---|---|---|
| Unlisted company | Less than ₹250 crore | No — AS 15 applies |
| Unlisted company | ₹250 crore or more | Yes |
| Listed / in process of listing (main board) | Any net worth | Yes |
| Listed on SME Exchange | Any net worth | Not mandatory |
| Holding / subsidiary / associate / JV of an Ind AS company | Any net worth | Generally yes |
How to account, either way:
- Recognition: Engage an actuary to value the obligation using the Projected Unit Credit Method (PUCM), and recognise the net defined benefit obligation — the present value of the obligation less the fair value of plan assets — on the balance sheet.
- Measurement & disclosure: Determine the service cost, interest cost, and actuarial gains/losses for the period, and disclose the actuarial assumptions used along with a reconciliation of the opening and closing obligation in the notes to accounts.
AS 15 vs Ind AS 19: Key Differences at a Glance
| Aspect | AS 15 | Ind AS 19 |
|---|---|---|
| Applicability | Unlisted companies with net worth under ₹250 crore | Listed companies (any net worth) and unlisted companies with net worth ₹250 crore or more |
| Actuarial gains/losses | Recognised in P&L immediately | Recognised in Other Comprehensive Income (OCI); never recycled to P&L |
| Interest component | Separate interest cost and expected return on plan assets | Single net interest computed on the net defined benefit liability/asset |
| Past service cost | Amortised over the vesting period if unvested | Recognised immediately in P&L, whether vested or not |
| P&L presentation | One combined expense line | Service cost + net interest in P&L; remeasurements in OCI |
| Disclosures | Reconciliation and assumptions | Adds sensitivity analysis, maturity profile, and risk exposures |
| Actuarial gain/loss breakdown | No separate breakup by source | Broken up into demographic, financial, and experience components |
The differences below aren’t cosmetic — they change how much of an actuarial swing shows up in reported profit, and when.
Difference in Detail: Past Service Cost
Scenario: A manufacturing company with roughly 400 employees revises its gratuity benefit formula mid-year as part of a wage settlement. The change creates a past service cost of ₹3.2 crore, and the remaining average vesting period for the affected employees is 4 years.
| Year | AS 15 — P&L Charge | Ind AS 19 — P&L Charge |
|---|---|---|
| Year 1 (amendment year) | ₹80 lakh | ₹3.2 crore |
| Year 2 | ₹80 lakh | — |
| Year 3 | ₹80 lakh | — |
| Year 4 | ₹80 lakh | — |
| Total over 4 years | ₹3.2 crore | ₹3.2 crore |
Same total cost, different timing. AS 15 smooths the past service cost over the remaining vesting period, so profit takes a smaller, steadier hit each year. Ind AS 19 requires the entire ₹3.2 crore to be expensed immediately in the year of amendment — vested or not — producing a much sharper one-time P&L impact in the year the settlement is signed. For a CFO negotiating a wage settlement, this is a real difference in how the numbers land on that year’s income statement, even though the cash outflow is identical either way.
Difference in Detail: P&L vs OCI
Scenario: For the same company, the annual actuarial valuation for the year reports a current service cost of ₹85 lakh, an interest cost on the obligation of ₹42 lakh, an expected return on plan assets of ₹28 lakh, and an actuarial loss (remeasurement) of ₹35 lakh, driven mainly by a fall in the discount rate.
AS 15 — everything hits Profit & Loss
| Component | Amount |
|---|---|
| Current service cost | ₹85 lakh |
| Interest cost | ₹42 lakh |
| Expected return on assets | (₹28 lakh) |
| Actuarial loss | ₹35 lakh |
| Total P&L charge | ₹1.34 crore |
Ind AS 19 — split between P&L and OCI
| Component | Amount |
|---|---|
| Current service cost (P&L) | ₹85 lakh |
| Net interest, 42 − 28 (P&L) | ₹14 lakh |
| P&L subtotal | ₹99 lakh |
| Actuarial loss (OCI, not recycled) | ₹35 lakh |
| Total comprehensive cost | ₹1.34 crore |
The total cost to the company is identical — ₹1.34 crore either way. But under Ind AS 19, only ₹99 lakh flows through Profit & Loss; the ₹35 lakh actuarial swing is diverted to OCI and never comes back to the P&L in a later period. AS 15 has no OCI concept, so the entire ₹1.34 crore runs through the income statement. This is the single biggest reason reported “employee benefit expense” numbers can look meaningfully different for otherwise identical companies, depending purely on which standard they follow.
What Remains the Same
It’s easy to focus on the differences and assume the two frameworks are entirely different animals. They aren’t — the underlying actuarial mechanics are shared:
- Actuarial method. Both standards mandate the Projected Unit Credit Method (PUCM) to determine the defined benefit obligation.
- Defined benefit classification. Gratuity is treated as a post-employment defined benefit plan under both frameworks, with the employer bearing the actuarial and investment risk.
- Annual valuation. Both require a fresh actuarial valuation, ordinarily performed every year by a qualified actuary.
- Discount rate basis. Both anchor the discount rate to market yields on government bonds, given the absence of a deep corporate bond market in India.
- Balance sheet recognition. Both require the net liability (or asset) — obligation less plan assets — to be recognised in full on the balance sheet; no smoothing or deferral of the balance sheet number is permitted under either standard.
- Core cost components. Current service cost and interest form the base of the periodic charge in both standards, even though how that charge is presented in the P&L differs.
A Note on Other Long-Term Benefits: Leave Encashment
One thing that surprises people the first time they encounter it: the AS 15 vs Ind AS 19 split described above is specific to post-employment defined benefit plans like gratuity and pension. For other long-term employee benefits — leave encashment (compensated absences) being the most common example, along with things like long-service awards — both standards treat the accounting identically.
Under both AS 15 and Ind AS 19, leave encashment is actuarially valued (again using PUCM), and the entire cost — including actuarial gains and losses — is recognised in Profit & Loss in the period it arises. There is no OCI split for these benefits under Ind AS 19; that treatment is reserved for post-employment defined benefit plans. So while your gratuity expense line may look quite different depending on which standard you follow, your leave encashment expense line generally won’t.
In Summary
AS 15 and Ind AS 19 arrive at the same underlying economics — the same total cost, the same balance sheet liability — but they get there differently. The practical differences show up in timing (past service cost) and in presentation (P&L vs OCI), not in the fundamental actuarial approach, which both standards share. Knowing which standard applies to your company, and what that means for how your numbers will read, is worth getting right well before your year-end audit — not during it.
Need an actuarial valuation under AS 15 or Ind AS 19, or help interpreting one you’ve already received? Get in touch with Actuaria — think of new age actuaries, think of Actuaria.