Ind AS 19 distinguishes the cost of employee service from remeasurement of post-employment defined benefit plans. It also treats long-term leave differently from gratuity. Check the plan rules and the law in force for the valuation date and expected benefit; the examples below are fictional.
Classify the benefit before measuring it
| Category | Examples and test | Recognition |
|---|---|---|
| Short-term benefits | Wages and other non-termination benefits expected to be settled wholly before 12 months after the end of the annual reporting period in which the service is rendered. | Measure without discounting. For accumulating paid absences, recognise the expected additional amount from unused entitlement as service increases it; for non-accumulating absences, recognise when the absence occurs. |
| Defined contribution post-employment plans | Fixed contributions with no legal or constructive obligation to fund a shortfall. Assess the obligation, not the name of the fund. | Recognise contributions for employee service, subject to another standard requiring or permitting asset cost. Discount amounts not expected to be settled wholly within the relevant 12 months. |
| Defined benefit post-employment plans | Post-employment promises other than defined contribution, such as many gratuity plans. Funding does not remove an employer’s obligation. | Use Projected Unit Credit (PUC). Split service cost, net interest and remeasurements as shown below. |
| Other long-term benefits | Leave or other service benefits that are not short-term, post-employment or termination benefits. | Recognise service cost, net interest and remeasurements in profit or loss unless another standard requires or permits inclusion in an asset. |
| Termination benefits | Amounts provided in exchange for termination, rather than future service or routine benefits earned through service. | Recognise at the earlier of the date the offer can no longer be withdrawn and recognition of an Ind AS 37 restructuring involving the payment. |
Check which gratuity law applies
The Payment of Gratuity Act, 1972 applies to the historical pre-transition cases where relevant. The gratuity provisions of the Code on Social Security, 2020 took effect on 21 November 2025 under S.O. 5319(E). For current valuations, check Chapter V, the First Schedule, applicable rules and notifications, savings and any better contractual terms. In particular, check the Code’s wage definition and fixed-term provisions. Do not carry a historic wage base or eligibility assumption into a current valuation unchanged.
Measure the obligation using projected unit credit
PUC treats each period of service as generating an additional unit of benefit. Project the amount and timing of eligible payments, attribute benefits under the plan formula and discount them. Use straight-line attribution over the relevant period when later service produces materially higher benefits, applying paragraphs 70–74. A qualifying-service condition does not necessarily mean that all cost starts at vesting; reflect the probability of meeting it.
- Use unbiased, mutually compatible assumptions for salary progression, withdrawal, mortality and payment timing. A particular mortality table is not mandated. Adjust the model for the relevant population and plan provisions.
- For INR obligations use reporting-date market yields on government bonds consistent with the estimated term. For a non-INR currency with a deep market in high-quality corporate bonds, use the applicable corporate bond yields in that currency. Ind AS 19 encourages involvement of a qualified actuary for material post-employment obligations; management remains responsible for the measurement.
Separate service cost, interest and remeasurements
The net defined benefit liability is the present value of the obligation less fair value of qualifying plan assets. A surplus is recognised as an asset only up to the asset ceiling, the present value of available refunds or reductions in future contributions. Consider restrictions and minimum funding requirements under the applicable guidance.
| Component | Measurement | Presentation |
|---|---|---|
| Service cost | Current service cost, past service cost and settlement gains or losses. | Profit or loss, subject to applicable inclusion in asset cost. |
| Net interest | Apply the discount rate to the relevant net opening balance, allowing for contributions and payments and resetting after qualifying mid-period remeasurements. | Profit or loss, subject to applicable inclusion in asset cost. |
| Remeasurements | Actuarial gains or losses, plan asset returns excluding interest and changes in the asset-ceiling effect excluding interest. | OCI for post-employment defined benefit plans. No later recycling to profit or loss; a transfer within equity is permitted. |
| Issue | AS 15, where applicable | Ind AS 19 |
|---|---|---|
| Defined benefit actuarial gains or losses | Generally recognised in profit or loss. | Recognised in OCI. |
| Plan asset return | Expected return used in determining defined benefit cost. | Interest on plan assets uses the discount rate; the remaining return is a remeasurement. |
| Discount benchmark | Government bond yields under paragraph 78. | Government bond yields for INR; paragraph 83 has a specific rule for other currencies with deep high-quality corporate bond markets. |
| Past service cost | Immediately recognise vested benefits; otherwise recognise over the average period to vesting under the general AS 15 rule. | Recognise at the earlier of the plan amendment or curtailment and recognition of related restructuring costs or termination benefits. |
| Sensitivity disclosures | Apply the disclosure requirements and any applicable relief. | Show significant assumptions and reasonably possible changes under paragraph 145. |
Six worked examples
1. Funded gratuity reconciliation for FY 2024–25
Assume opening obligation of ₹1,000 lakh, opening plan assets of ₹850 lakh and an opening discount rate of 7.20%. Current service cost is ₹85 lakh, benefit payments from plan assets ₹60 lakh, contributions ₹100 lakh and actual asset return ₹70 lakh. Assume the payments and contribution occur at year-end, with no other events.
| Line | Obligation (₹ lakh) | Plan assets (₹ lakh) |
|---|---|---|
| Opening | 1,000.00 | 850.00 |
| Current service cost | 85.00 | — |
| Interest | 72.00 | 61.20 |
| Benefits paid | (60.00) | (60.00) |
| Employer contribution | — | 100.00 |
| Remeasurement | 23.00 loss | 8.80 gain |
| Closing | 1,120.00 | 960.00 |
The expected obligation before remeasurement is ₹1,097 lakh. The actual obligation is ₹1,120 lakh, so the actuarial loss is ₹23 lakh. Actual plan asset return of ₹70 lakh less interest of ₹61.20 lakh gives ₹8.80 lakh of asset remeasurement gain. Profit or loss expense is ₹95.80 lakh (₹85 lakh service cost plus ₹10.80 lakh net interest) and OCI loss is ₹14.20 lakh. Closing net liability is ₹160 lakh: ₹150 lakh opening plus ₹95.80 lakh profit or loss and ₹14.20 lakh OCI, less ₹100 lakh contributions.
2. Long-term leave encashment for FY 2024–25
Assume an unfunded scheme lets employees accumulate up to 60 days of leave and is not expected to settle wholly within the short-term window. Opening obligation is ₹300 lakh. Service cost is ₹40 lakh, interest at an opening 7.5% rate is ₹22.50 lakh, and payments of ₹30 lakh occur at year-end. Assume the actuary measures a ₹35 lakh remeasurement loss after a rate decline to 6.8% and salary experience of 10% versus 7% assumed.
The closing obligation is ₹367.50 lakh (300 + 40 + 22.50 − 30 + 35). Under paragraph 156, the ₹97.50 lakh total service cost, interest and remeasurement goes to profit or loss on these facts. The ₹35 lakh is a stated valuation input, not derived from the rate changes alone.
3. Historical increase in the gratuity ceiling
S.O. 1420(E) increased the ceiling under the earlier Payment of Gratuity Act from ₹10 lakh to ₹20 lakh on 29 March 2018. Assume an affected plan measured immediately before and after the change on the same assumptions rises from ₹1,080 lakh to ₹1,200 lakh for service already rendered. The ₹120 lakh difference is past service cost. Apply paragraph 103 at the earlier of the plan amendment or curtailment and recognition of related restructuring costs or termination benefits. Do not treat the plan amendment as an actuarial assumption change in OCI.
4. Sensitivity of the defined benefit obligation
A simplified cohort has a base obligation of ₹50 crore and a projected payout in eight years, with 7% discount, 8% salary growth and 10% annual withdrawal. To isolate the effects, assume no payout for those withdrawing in this example and an amount at year eight that scales with projected salary and cohort survival. For each one-percentage-point shock, multiply the base by the eighth power of the relevant ratio: 1.07 divided by one plus the new discount rate; one plus the new growth rate divided by 1.08; or one minus the new withdrawal rate divided by 0.90. Change one input at a time.
| Assumption changed | Revised obligation (₹ crore) | Change (₹ crore) | Change (%) |
|---|---|---|---|
| Discount rate: 7.00% to 8.00% | 46.41 | -3.59 | -7.17% |
| Discount rate: 7.00% to 6.00% | 53.90 | +3.90 | +7.80% |
| Salary growth: 8.00% to 9.00% | 53.83 | +3.83 | +7.65% |
| Salary growth: 8.00% to 7.00% | 46.41 | -3.59 | -7.17% |
| Withdrawal: 10.00% to 11.00% | 45.72 | -4.28 | -8.55% |
This simplified model shows the arithmetic, not a template for a live valuation. Higher withdrawal can increase or decrease the obligation depending on eligibility and settlement patterns. Mortality effects also depend on plan terms. For actual disclosures use the same measurement method as the closing obligation and explain limitations and changes in methodology.
5. Asset ceiling for an overfunded trust
Plan assets of ₹1,200 lakh less obligations of ₹900 lakh produce a ₹300 lakh surplus. Assume refunds are unavailable but the present value of available contribution reductions is ₹180 lakh. The recognised asset is ₹180 lakh and the ceiling effect is ₹120 lakh. If that ceiling effect arises entirely in the period and none is included in net interest, recognise it as a remeasurement in OCI. In a real roll-forward separate the net interest and remeasurement portions.
6. Settlement versus benefit payment
An employer makes a special payment to 40 participants that extinguishes the covered pension obligation and is not a routine payment already reflected in plan terms and actuarial assumptions. Immediately before settlement, remeasure the plan under paragraph 99. If the obligation settled is ₹450 lakh and the settlement price is ₹410 lakh with no other consideration, recognise a ₹40 lakh gain in profit or loss. A normal payment under the plan is not automatically a settlement.
Controls and disclosures
- Reconcile census data, qualifying wages, leave balances, entrants and exits to payroll and plan records. Confirm statutory or contractual amendments with their effective dates.
- Check the reference yield, timing of benefits and contributions, and actual experience against assumptions. Use current information at each relevant reporting date; interim estimates need support.
- Explain plan risks, reconcile obligations, assets and ceiling effects, disclose significant assumptions and sensitivity, and report funding arrangements and the maturity profile under paragraphs 135–150.
Frequently asked questions
1. Can corporate bonds be used for INR gratuity?
No. Use the Ind AS 19 government-bond benchmark for INR obligations. The deep high-quality corporate bond market exception in paragraph 83 is for currencies other than INR.
2. Are defined benefit remeasurements recycled to profit or loss?
No, for post-employment defined benefit plans. The cumulative amount may be transferred within equity. Other long-term benefits follow the separate paragraph 156 rule.
3. Is headcount below ten an automatic exemption?
No. Check the category of establishment, past coverage, applicable notifications and statutory, contractual or constructive obligations. A current headcount snapshot does not determine coverage or extinguish an existing obligation. Measure material obligations under the applicable accounting standard.
4. How is tax on OCI remeasurements presented?
Under Ind AS 12, tax relating to OCI items generally follows the underlying item into OCI. For a ₹10 lakh OCI loss that creates an equally large deductible temporary difference, assume the deferred tax asset qualifies and the appropriate reversal rate is 25.168%. The tax credit is ₹2,51,680 and the net OCI loss is ₹7,48,320. Verify tax base, the applicable enacted or substantively enacted rate and recoverability.
5. What if an employee leaves before five years?
Do not reverse mechanically. Check the governing law, continuous service, exit reason, plan and eligibility. Under the Code, the general five-year condition has exceptions, including death, disablement and expiry of fixed-term employment; the Labour Ministry’s March 2026 FAQ addresses one year of service under the fixed-term contract. If nothing remains payable, reflect the difference between expected and actual experience in the relevant remeasurement.
6. Does annual leave encashment make a plan short-term?
Only if settlement of the benefit is expected wholly before 12 months after the end of the annual reporting period in which the service was rendered. An annual encashment option is evidence, not a conclusion; consider actual carry-forward patterns and expected settlement timing.
Sources
- ICAI compendium: notified Ind AS 19, Employee Benefits
- ICAI compendium: Ind AS 12, paragraphs 24, 47 and 61A
- ICAI compendium: AS 15, Employee Benefits
- Code on Social Security, 2020: sections 53–54, First Schedule and savings
- Gazette S.O. 5319(E): commencement of Code provisions
- Social Security (Central) Rules, 2026, G.S.R. 344(E)
- Labour Ministry: March 2026 FAQs, including fixed-term employment
- Gazette S.O. 1420(E): 2018 historical gratuity ceiling increase
- Income Tax Department: AY 2026–27 domestic company rates