Every Indian annual report carries a defined-benefit note, including young software companies with no pension scheme of any kind, because the statutory benefits are themselves defined benefits.
How is gratuity calculated and funded?
Gratuity is compulsory under the Payment of Gratuity Act, 1972 for establishments employing ten or more people. The benefit is fifteen days of last-drawn wages for each completed year of service, computed on a twenty-six day month, so the formula is last-drawn monthly salary times fifteen times completed years divided by twenty-six. It vests after five years of continuous service, with the vesting condition waived on death or disablement.
A statutory ceiling caps the amount payable. The same figure doubles as the income-tax exemption limit for a private-sector employee, and it stood at ₹20,00,000 following the 2018 amendment to the Act. It has been revised upward before. Verify the current ceiling against the Payment of Gratuity Act as amended and the relevant income-tax notification before using it; checked September 2026.
Gratuity may be funded through an insurer-managed trust or left unfunded. An unfunded plan has no plan assets, so net interest is just the discount rate on the whole obligation and there are no asset remeasurements. Many mid-size Indian companies leave it unfunded, which leaves the obligation as an unsecured claim on the company itself, with no ring-fenced trust behind it. That difference belongs in a credit assessment.
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What is an exempt provident fund trust?
Provident fund is a defined contribution plan in its ordinary form: the employer pays a statutory percentage of basic wages and dearness allowance into the Employees' Provident Fund Organisation, expense equals contribution, and nothing else happens. The complication is the exempt trust. A company granted exemption runs its own provident-fund trust and must guarantee its members a return at least equal to the rate the Organisation declares each year. Any shortfall is the employer's to make good. That guarantee is a defined-benefit obligation, and an exempt-trust employer therefore carries an actuarially valued interest-rate guarantee alongside its gratuity liability. The declared rate moves every year and so does the shortfall. Verify the current declared rate with the Employees' Provident Fund Organisation for the year you are reading.
How is leave encashment accounted for?
Leave encashment, or compensated absences, is the third statutory item, and it's the one that behaves differently. Accumulated leave that an employee can encash is an employee benefit, and where it isn't expected to be settled wholly within twelve months it's an other long-term employee benefit under Ind AS 19. The measurement is the same actuarial exercise as gratuity. The routing isn't. For other long-term benefits, remeasurements go to profit or loss instead of other comprehensive income.
That single difference is worth an exam question and a real analyst adjustment. A company with a large leave liability and volatile assumptions gets that volatility in its earnings, while the same volatility on its gratuity plan is invisible below the profit line. Two lines in the same note, valued by the same actuary on the same day, with opposite consequences for reported profit.
What is the Code on Social Security, 2020?
One further item on the horizon. The Code on Social Security, 2020 consolidates the gratuity and provident-fund statutes and changes eligibility in places, including for fixed-term employees. Its provisions have been brought into force in stages and the rules under it are notified separately. Verify the commencement status and the notified rules before relying on any specific provision; checked September 2026.