Page 169 - Group Insurance and Retirement Benefit IC 83 E- Book

15 days salary was construed as salary for half a month and on that basis gratuity was

being paid. But some of the unions went to Court claiming that monthly salary pertains to
26 working days, leaving four Sundays. This contention was accepted by the Courts, and

on that basis the gratuity was calculated at the rate of 15 days salary and each day‘s
salary was taken as 1/26th of the monthly salary. This was also incorporated in the

Gratuity Act by an amendment.

Thus it is a statutory liability and all the employers (with 10 or more employees) covered

under the Act have to make the payments compulsorily.

For a long time most of the employers were paying gratuity on a ―Pay as you go method‖.

That is whenever an employee resigns, retires or dies his gratuity was paid in that year
and shown as expenses for that year. No provision or funding was made. But as the

liability arises every year, it was felt that each year‘s balance sheet should reflect that
year‘s liability in respect of that year‘s gratuity. At the same time, the gratuity actually

payable at the time of exit will depend on the time of exit and the salary at the time of
exit, which are variables and cannot be determined with precision. Therefore an actuarial

valuation, taking into account the probabilities of salary increase, death, resignation and

retirement, was made mandatory as per the Accounting Standard-15 (AS-15) issued by
the Institute of Chartered Accountants of India.

Different ways of meeting Gratuity Liability:

(i) An employer may set up an internal reserve or provision in the books of accounts

based on actuarial valuation of the liability.

(ii) An employer may set up an irrevocable gratuity trust fund which is approved under

part ‗C‘ of the Fourth Schedule of the Income Tax Act 1961.

(iii) An employer may set up a fund as in (ii) and the trustees may enter into a group

gratuity scheme with an insurer.