7th Pay Commission and Gratuity Liability
Remuneration of Central Government employees are governed by
CCS Pension Rules and are revised from time to time with the coming of Pay
Commissions. 7th Pay Commission an up gradation of the earlier 6th
pay commission brought many changes. Gratuity being an important retirement
benefit in the Indian Context was targeted structurally in the new pay
commission:-
Some notable changes in the Gratuity Benefit are as under:-
Gratuity as per 6th
Pay Commission:-
(a) Service Gratuity- No pension is
admissible to a permanent employee who retires before completion of 10 years'
qualifying service. Instead, a lump sum payment known as Service Gratuity at
the rate of half-month's emoluments for every completed six-monthly period of
qualifying service is admitted.
This gratuity is in addition to
retirement gratuity admissible to those who have completed 5 years'
qualifying service. Since it is not possible to find an employee with less
than 10 years of service with joining before 31.12.2003, it may be considered
as non existent.
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(b) Retirement Gratuity-
Retirement Gratuity is admissible to all employees who retire after
completion of 5 years of qualifying service at the rate of 'one-fourth' of
emoluments for each completed six-monthly period of qualifying service
subject to a maximum of 16.5 times 'the emoluments' or `10 lakhs . Emoluments include DA
on the date of cessation of service.
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(c) Death Gratuity- Death
Gratuity is admissible in case of death in service of an employee at the
following rates: -
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(i) Less than
one year
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2 times of
'emoluments'
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(ii) One year
or more, but less than 5 years
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6 times of
'emoluments'
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(iii) 5 years
or more, but less than 20 years
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12 times of
'emoluments'
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(iv) 20 years'
or more
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Half of emoluments for every completed six-monthly period of
qualifying service subject to a maximum of 33 times 'emoluments' or `10 lakhs whichever is less.
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(d) Gratuity in no case
shall exceed `10,00,000/-
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Gratuity as per 7th Pay Commission:-
(a) Retirement Gratuity-
Retirement Gratuity is admissible to all employees who retire after
completion of 5 years of qualifying service at the rate of 'one-fourth' of
emoluments for each completed six-monthly period of qualifying service
subject to a maximum of 16.5 times 'the emoluments' or `20 lakhs, whichever is less.
Emoluments include DA on the date of cessation of service.
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(b) Death Gratuity- Death
Gratuity is admissible in case of death in service of an employee at the
following rates: -
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(i) Less than
one year
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2 times of
'emoluments'
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(ii) One year
or more, but less than 5 years
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6 times of
'emoluments'
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(iii) 5 years
or more, but less than 11 years
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12 times of
'emoluments'
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(iv) 11 years or
more, but less than 20 years
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20 times of
'emoluments'
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(v) 20 years'
or more
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Half of emoluments for every completed six-monthly period of
qualifying service subject to a maximum of 33 times 'emoluments' or `20 lakhs whichever is less.
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(c) The monetary ceiling on Gratuity will increase by
25% whenever DA rises by 50% of the basic pay.
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Some Key Changes
under 7th Pay Commission and their effect on Gratuity Liability:-
- DA Merged with Basic:- Basic Salary (including Basic Pay and Grade Pay) under CCS Pension Rules generally increases by 3% Compound interest while DA being a certain %age over Basic increases by certain Simple Interest. Once DA gets merged with Basic, price escalation till retirement takes into account of compounding effect of Basic Pay and results in an substantial increase in liability.
- Change in Gratuity Ceiling:- Before
7th Pay Commission Monetary Ceiling on Gratuity was restricted
to `10 lakh which means
a government employee cant draw a Gratuity of more than `10 lakh in their life time.
With the changes in the 7th Pay Commission, this monetary
ceiling has been increased to `20
lakh. With this change Gratuity liability of the Government employees
specially ones drawing higher salary will result in an increase in
liability. There is also a special provision under 7th pay
commission which says “The monetary ceiling on Gratuity will increase
by 25% whenever DA rises by 50% of the basic pay”. This special provision will certainly
act as a catalyst for pushing the liability further up and tending the
Gratuity liability towards the Gratuity Liability with no ceiling!
- Change in rates in case of Death
Gratuity:- Earlier for an employee dying during service period in the
interval “5 years or more, but less than 20 years” death
gratuity was admissible as 12
times of “emoluments”, now under 7th Pay Commission this
interval is break down as under :-5 years or more, but less than 11 years12 times of 'emoluments'11 years or more, but less than 20 years20 times of 'emoluments'
With this new change, the Gratuity
liability of an employee for the reason of Death will increase.
Falling of government bond yields
resulting in falling of interest rate of discounting will again cause an
increment in Gratuity Liability.
The Consolidated effect of the
above changes may bring an increase in Gratuity liability of appx 2.5 times the
liability reported in the previous financial year. Actual increase may further
increase if data has high composition of employees with large salaries and
large service period.
Hope this article helped in
analyzing effect on Gratuity liability after 7th pay commission
implementation.
Views expressed in this article are
mine and not necessary refer to my employer.
Rajat
Gupta
Manager:
Actuarial Services
M.L. Sodhi Consulting
Actuary