How to manage gratuity obligations as your team grows

Gratuity is one of the most significant long-term employment liabilities for Indian companies and one of the least actively managed. By the time your long-serving employees reach 5 years, you need either cash reserves or an insurance policy to fund the obligation — not a year-end surprise on your balance sheet.

The legal framework: the Payment of Gratuity Act applies to establishments with 10 or more employees. Any employee who has completed 5 or more years of continuous service is entitled to gratuity on leaving — resignation, retirement, retrenchment, or death. The formula: (last drawn basic + DA) × 15/26 × number of completed years of service. The maximum is ₹20L per employee (as of the last amendment).

Gratuity funding: you have two options. Fund it as it comes due (pay from operating cash when employees leave — simpler but creates unpredictable cash outflows), or fund it through a Group Gratuity Insurance scheme (a policy with LIC or a private insurer where you make annual contributions and the insurer pays the gratuity when it falls due — smooths the cash flow and gives you tax deduction on the contribution under Section 36(1)(v)).

For companies with more than 15–20 employees with 3+ years of service, a Group Gratuity Insurance policy is almost always the right answer. The annual premium is spread across your team rather than hitting when multiple long-serving employees happen to leave in the same year.

Accounting for gratuity: AS 15 (Accounting Standard 15) requires that the gratuity liability be actuarially valued and disclosed in your financial statements. Your auditor will ask for this. An actuarial valuation is relatively inexpensive (₹10,000–25,000) and provides the liability figure your auditor needs.