Money & Banking

Insurers get 5 years to spread gratuity outgo

Our Bureau Hyderabad | Updated on April 18, 2011

Insurance companies can now amortise the additional liability on account of gratuity over a period of five years starting from financial year 2010-11.

The additional liability was the result of the pay revision of the officers and employees given by the Public Sectors Insurance companies in 2010-11.

In addition, the Government had also revised upward maximum limit for Gratuity under Payment of Gratuity Act 1972 from Rs 3.50 lakh to Rs 10 lakh.

“The above factors will lead to the increase in liability on account of gratuity which in turn will impact the insurers' profitability significantly as they need to provide the same in the financial year 20010-11,'' Mr R.K. Nair, Member, Insurance Regulatory and Development Authority (IRDA), said in a circular on Accounting Treatment of Enhanced Provision of Gratuity issued on Monday.

This would cause a strain on their solvency as well as on their performance results, he added. The additional liability on account of enhancement in gratuity limits should be fully recognised and charged to Revenue Account and/or Profit and Loss Account for the financial year 2010-11.

If not fully charged to the above-said accounts, the expenditure be amortised over a period of five years beginning with the financial year ending March 31, 2011 subject to a minimum of 1/5th of the total amount involved every year.

The unamortised expenditure carried forward should not include any amounts relating to separated/retired employees, the circular added.

Published on April 18, 2011

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