Actuarial Liability of Gratuity under 7th Pay Commission

7^th 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. 7^th Pay Commission an up gradation of the earlier 6^th 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 6^th 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.

(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.

(c) Death Gratuity- Death Gratuity is admissible in case of death in service of an employee at the following rates: -

(i) Less than one year

2 times of 'emoluments'

(ii) One year or more, but less than 5 years

6 times of 'emoluments'

(iii) 5 years or more, but less than 20 years

12 times of 'emoluments'

(iv) 20 years' or more

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.

(d) Gratuity in no case shall exceed `10,00,000/-

Gratuity as per 7^th 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.

(b) Death Gratuity- Death Gratuity is admissible in case of death in service of an employee at the following rates: -

(i) Less than one year

2 times of 'emoluments'

(ii) One year or more, but less than 5 years

6 times of 'emoluments'

(iii) 5 years or more, but less than 11 years

12 times of 'emoluments'

(iv) 11 years or more, but less than 20 years

20 times of 'emoluments'

(v) 20 years' or more

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.

(c) The monetary ceiling on Gratuity will increase by 25% whenever DA rises by 50% of the basic pay.

Some Key Changes under 7^th Pay Commission and their effect on Gratuity Liability:-

1. 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.

2. Change in Gratuity Ceiling:- Before 7^th 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 7^th 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 7^th 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!

3. 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 7^th Pay Commission this interval is break down as under :-

   5 years or more, but less than 11 years	12 times of 'emoluments'
   11 years or more, but less than 20 years	20 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 7^th 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