Mandatory Requirement of Gratuity Provision As Per AS 15/ Ind AS 19

All the companies are required to maintain their accounts and prepare financial statements as per Accounting Standards under the companies act, 2013. Among others, AS 15/ Ind AS 19 is also a mandatory standard over which the Auditor is required to comment on the adequacy of provisions (as per Actuarial Valuation method – PUCM) made under this standard for Benefits like Gratuity, Leave Encashment.

The above picture summarises the Applicability and provisions of Gratuity and Leave Actuarial Valuation as required under Accounting Standard 15 & Ind AS 19.

In companies where PF Act is applicable, Gratuity Act is automatically applicable. So ensure that Actuarial Valuation is conducted in ALL such Companies whether public or private, listed or unlisted. This Note explains the rationale for the same and the rules about this requirement.

This provision for long-term employee benefits is also helping secure timely and appropriate due payment of social security benefits paid to eligible employees.

Forfeiture of Gratuity:

The gratuity payable to an employee shall be wholly forfeited for the following reason mentioned:

  1. If the service of such employee has been terminated for his riotous or disorderly conduct or any other act of violence on his part; or
  2. If the service of such employee is terminated for any act which constitutes an offense involving moral turpitude provided that such offense is committed by him in the course of his employment. In order to forfeit the gratuity of an employee, there must be a termination order containing charges as established to the effect that the employee was guilty of the aforesaid misconducts. In one case, it has been held that in the absence of a termination order containing any of the above allegations, the gratuity of an employee cannot be forfeited.

Duty of employer to pay gratuity and mode for payment:

Section 4 of the Act mentions the obligation of an employer of an establishment to consider the case of each employee in the matter of payment of gratuity to him. The employer shall arrange to pay the amount of gratuity within 30 days from the date it becomes payable to the person to whom the gratuity is payable. If the amount of gratuity payable under the section is not paid by the employer within the period specified, from the date on which the gratuity becomes payable he will have to pay simple interest on it at the rate not exceeding the rate notified by the Central Government from time to time.

The mode for the payment of gratuity is prescribed under section 9 of the Payment of Gratuity Act, 1972. The said section contemplates that gratuity payable under the Act should be paid in cash, or if so desired by the payee, by demand draft or bank cheque to the eligible employee, nominee, or legal heir, as the case may be.

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