Defined benefit plans explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
A funded gratuity scheme is a defined benefit plan: the employer carries the actuarial and investment risk, so the expense is not simply the contribution paid. Ind AS 19 asks the company to show the net of the obligation and the plan assets on the balance sheet and to split the yearly movement into service cost and net interest in profit or loss, and remeasurements in other comprehensive income. This guide follows that split with a worked year.
Measure the obligation with the projected unit credit method (paragraph 67), discount it by reference to government bond yields for rupee obligations (paragraph 83) and deduct plan assets at fair value (paragraph 113). Put service cost and net interest in profit or loss and remeasurements in other comprehensive income, never reclassified to profit or loss later (paragraphs 120 and 122).
Ind AS as on 1 April 2025 (ICAI Compendium of Ind AS 2025-26, the standards notified under the Companies (Indian Accounting Standards) Rules, 2015). Amendments notified after 1 April 2025 are not reflected in this article and should be checked on mca.gov.in. For a growing company, getting the gratuity entries right is part of the wider finance function that virtual CFO services support.
What the paragraphs require
| Paragraph | Requirement | What it means in practice |
|---|---|---|
| 57 | Steps: find the deficit or surplus, apply the asset ceiling, find the profit or loss amounts, find the OCI remeasurements | Do each plan separately where material |
| 58-59 | Determine the net liability often enough that it is not materially different from the year-end figure; a qualified actuary is encouraged, not required | The valuation is the actuary's work; the company owns the assumptions it accepts |
| 63-64 | Show the net defined benefit liability (asset); a surplus is limited to the asset ceiling | A funded plan in surplus may not show the full surplus |
| 67-69 | Projected unit credit method; discount the whole obligation | Each year of service adds a unit of benefit |
| 75-80 | Assumptions unbiased and mutually compatible, based on market expectations at the year end | Salary growth, attrition and the discount rate should share one economic view |
| 83-85 | Discount rate by reference to government bond yields for the rupee, matched to the currency and term of the obligation | Not the company's own borrowing rate (paragraph 84) |
| 102-106, 109-111 | Past service cost on a plan amendment or curtailment; gain or loss on settlement | Recognised when the amendment or settlement occurs |
| 113-115 | Plan assets at fair value; exclude unpaid contributions and the entity's own non-transferable instruments | Qualifying insurance policies are plan assets |
| 120, 122A, 123-125 | Service cost and net interest in profit or loss; current service cost uses start-of-year assumptions; net interest = net liability x discount rate at the start | Interest income on plan assets is part of net interest |
| 127-130 | Remeasurements in OCI: actuarial gains and losses, return on plan assets above interest income, change in the asset ceiling effect | Costs of managing the assets are deducted from the return |
Ind AS 19 paragraph 83 differs from IAS 19 on the discount rate for rupee plans, as the standard's comparison with IFRS records. Employers using AS follow the different model in our AS 15 guide; the Ind AS 19 overview outlines the standard.
The method
- Obtain the actuary's report: opening and closing obligation, current service cost, assumptions, and the split of the actuarial gain or loss by cause.
- Fix the discount rate at the start of the year for interest (paragraph 123A) and at the year end for the closing obligation (paragraph 83).
- Roll forward the obligation: opening + current service cost + interest cost + past service cost - benefits paid +/- actuarial loss (gain).
- Roll forward the plan assets: opening + interest income + contributions - benefits paid +/- return above interest income.
- Net them: closing net liability = closing obligation - closing assets (limited to the ceiling if there is a surplus).
- Post service cost and net interest to profit or loss and remeasurements to OCI (paragraph 120).
Worked example
The entity and all figures in this example are invented for illustration.
Hemavati Pharma Limited runs a funded gratuity plan through a separate trust. For the year ended 31 March Year 2 the actuary reports the figures below (taken as given). The discount rate at the start of the year is 7.00 per cent a year, a government bond yield assumed for arithmetic only. The company contributes Rs 60 lakh and the trust pays benefits of Rs 70 lakh, both on the last day of the year, so neither changes the interest base. All amounts are in Rs lakh.
| Given by the actuary and the fund | Rs lakh |
|---|---|
| Opening obligation | 800.00 |
| Opening plan assets | 650.00 |
| Current service cost for the year | 90.00 |
| Actuarial loss from a lower year-end discount rate | 25.00 |
| Actuarial loss from experience (higher salary rises than assumed) | 15.00 |
| Actual return on plan assets | 52.00 |
Obligation roll-forward (paragraphs 67, 120 and 123).
| Step | Rs lakh |
|---|---|
| Opening obligation | 800.00 |
| Current service cost | 90.00 |
| Interest cost: 800.00 x 7.00% | 56.00 |
| Benefits paid | (70.00) |
| Actuarial loss (25.00 + 15.00) | 40.00 |
| Closing obligation | 916.00 |
Plan assets roll-forward (paragraphs 113 and 125). Interest income = 650.00 x 7.00% = 45.50. The return above interest income = 52.00 - 45.50 = 6.50, a remeasurement gain.
| Step | Rs lakh |
|---|---|
| Opening plan assets | 650.00 |
| Interest income | 45.50 |
| Return on assets above interest income | 6.50 |
| Contribution by the company | 60.00 |
| Benefits paid | (70.00) |
| Closing plan assets | 692.00 |
Net liability and where each part goes.
| Component | Rs lakh | Where (paragraph 120) |
|---|---|---|
| Current service cost | 90.00 | Profit or loss |
| Net interest: 56.00 - 45.50 | 10.50 | Profit or loss |
| Remeasurement: obligation loss 40.00 less asset gain 6.50 | 33.50 | OCI, not reclassified (paragraph 122) |
| Particulars | Debit (Rs lakh) | Credit (Rs lakh) |
|---|---|---|
| Employee benefit expense: current service cost | 90.00 | |
| Net interest on net defined benefit liability (profit or loss) | 10.50 | |
| To Net defined benefit liability | 100.50 | |
| Remeasurement of net defined benefit liability (OCI) | 33.50 | |
| To Net defined benefit liability | 33.50 | |
| Net defined benefit liability | 60.00 | |
| To Bank (contribution to the trust) | 60.00 |
Check. Net liability: opening 800.00 - 650.00 = 150.00. 150.00 + 100.50 + 33.50 - 60.00 = 224.00. Closing obligation 916.00 - closing assets 692.00 = 224.00. The two routes agree.
Because the plan shows a deficit there is no asset ceiling issue (paragraph 64). The company may transfer the OCI balance within equity if it chooses, but not to profit or loss (paragraph 122).
Presentation and disclosure
The net defined benefit liability is shown on the balance sheet (paragraph 63); the split into current and non-current is covered in employee benefit obligations under Schedule III. Paragraphs 135 to 147 require disclosure of the characteristics of the plan and its risks, a reconciliation from opening to closing balances of the obligation and the assets, the amounts in profit or loss and OCI, the main actuarial assumptions and sensitivity analyses, and the effect on future cash flows. The tax effect of the OCI item follows deferred tax under Ind AS 12.
Common mistakes
- Using the company's borrowing rate, or a bank deposit rate, instead of the government bond yield (paragraph 83).
- Putting actuarial losses through profit or loss.
- Computing interest on the closing balance instead of the opening balance and timed cash flows (paragraph 123A).
- Treating a contribution due but unpaid as a plan asset (paragraph 114).
- Booking the gratuity expense as the contribution paid, which is the defined contribution approach.
- Missing past service cost after a plan change, which is expensed at once (paragraph 103).
Need help with gratuity and leave accounting?
Turning an actuary's report into entries, disclosures and a reconciliation that your auditor accepts takes care, especially when the plan changes mid-year. Our team can work through the report with your finance staff as part of virtual CFO services, so the numbers reach the books correctly.
Key takeaways
- Net liability = obligation at present value less plan assets at fair value.
- Service cost and net interest go to profit or loss; remeasurements go to OCI and stay there.
- Interest uses start-of-year balances and rates, adjusted for the timing of contributions and benefits.
- The rupee discount rate follows government bond yields.
- The actuary computes; the company reviews and accepts the assumptions.
Read next
- Deferred tax under Ind AS 12: temporary differences, tax base and recognition, worked
- Provisions under Ind AS 37: recognition, measurement, discounting and onerous contracts
- Employee benefit obligations under Schedule III: the current split
- AS 15 Employee Benefits: defined benefit and disclosure
Disclaimer: Based on the Indian Accounting Standards as on 1 April 2025 (ICAI Compendium of Ind AS 2025-26, the standards notified under the Companies (Indian Accounting Standards) Rules, 2015) and, where named, the ITFG clarification bulletins of ICAI, as consulted on 4 October 2026. The worked example uses invented figures. Amendments notified after 1 April 2025 should be checked on mca.gov.in. This article is general information, not legal advice; check the official text before acting.