Calculating Employee Gratuity, Final Salary?

Charan Gupta Consultants Pvt. Ltd offers a wide range of actuarial services to its clients. The company helps the client company to calculate gratuity of its employees.

The steps that are involved in the calculation of employee final salary are illustrated with the help of the following example:-

Age at the time of Entry =24
Age at Valuation Date = 28
Retirement Age = 60
Salary Increment: 5.5%
Projected-Final-salary = Current-Salary * (1+5.5%) 60-28
=17875*(1.055) ^32
=99157

The next stage is to determine the projected retirement

Benefit/ gratuity amount = Projected Final Salary *15/26* No. of years of service
The amount of projected benefit that is accrued to the age of 28, is :
No. of years since date of entry to valuation date = 28-24 = 4 years
Proportion of projected gratuity benefit accrued up to age 28
= Projected Final Salary*15/26* No. of years since date of entry
= 99157 * 4*15/26
= 2, 28,824/-

All the benefit amounts calculated above (proportion of projected benefit and unit benefit) are applicable as at the date of Employees retirement from service. In order to determine their values (i.e. Actuarial Liability and Normal Cost, respectively) the benefit amounts need to be discounted for interest (time-value of money) and mortality.

In this example we assumed that there are no other pre-retirement terminations or decrements. However, in an actual actuarial valuation exercise, we have used other decrements such as terminations, early retirements, disability, etc.

Final Gratuity Liability
= Proportion of projected gratuity benefit accrued*((100-Discount Rate)/100) 60-28
=228824*(0.91) 60-28
=11189.00