Why is Actuarial Valuation required?

Actuarial valuation is an accounting exercise performed to estimate future liabilities arising out of benefits payable to employees of a company like gratuity, pensions and provident funds. These benefits are not paid immediately, but accrue over the term of employment of the employee. Hence, they need to be estimated and a provision must be made in the book of accounts of the company.

What are the various accounting standards?

Actuarial valuations are mandated by various accounting standards such as IND AS 19, AS – 15(R) , US-GAAP, IFRS etc. Under these accounting standards, actuarial valuation is performed to estimate the liability and make provisions for the same in the balance sheet.

Where can I find the data format for actuarial valuation?

For actuarial valuation, employee data of a company is to be provided such as employee name, date of birth, date of joining, salary etc. Our data format is tailored as per the requirements of Schedule III of The Companies Act and is available on our website.

What are the services you provide?

Our wide range of actuarial services include annual actuarial valuation for gratuity, leave, pensions, medical benefits, provident fund, ESOP valuations, retirement benefit consulting, funding valuations and actuarial consulting.

Where can I find sample reports for IND AS 19 and AS 15?

Sample or model actuarial valuation reports can be obtained which are modelled based on the IND AS 19 and AS 15 accounting standards and contain a model of all the disclosures required under these accounting standards.

How to do actuarial valuation?

Actuarial valuation is performed by a qualified actuary to disclose employee benefit obligations for reporting companies as per various accounting standards such as IND AS 19, AS 15(R), US GAAP etc. This is performed for gratuity, leave, pension and other schemes. Contact us to find out how we can help you with the process.

Components Excluded from Total Remuneration for Wage Calculation : Actuarial Valuation for Gratuity, Leave and Pension

Under the New Wage Code, these wage components are not considered as part of total remuneration which is used for computing the wage to be considered for gratuity:

1. Variable bonus,

2. Performance based incentives

3. ESOPs

4. All kinds of reimbursement based payments such as for travel/food/mobile/entertainment,

5. Gratuity payable on termination to employees, retrenchment benefits,

6. ESI,

7. Joining bonus, buyouts, etc.

All these above components are completely excluded from total remuneration and are not tracked under the 50% rule. However, do keep in mind the 15% rule used for factoring certain perks like food passes (Sodexo).

On the other hand, components like HRA, overtime, conveyance, and statutory bonuses are tracked for the purpose of computation under the 50% rule.

Rationale for excluding these wage components from “total remuneration

Understanding what is excluded from "total remuneration" is now critical for both employers and employees to ensure accurate statutory compliance for PF, gratuity, and ESI.

The Core Definition: What Constitutes Wages?

Under the new law viz. Section 2(y) of The Code on Wages, 2019, wages has been defined to includes three main components: Basic Pay, Dearness Allowance (DA), and Retaining Allowance. All other components are initially "excluded" from the very definition of wages. However, the law provides a list of specific items in clauses (a) to (i) of Section 2(y) that must be tracked because they form the basis of the 50% threshold calculation.

Items Excluded from "Total Remuneration"

When calculating the 50% threshold (to see if your allowances have exceeded half of your total pay), not every component in a Cost-to-Company (CTC) package is considered. The following items are strictly excluded from the "total remuneration" used for this calculation:

Gratuity: Actual gratuity paid or the gratuity component shown in a CTC is not included.
Statutory Benefits: While employer PF and pension contributions are included in the 50% calculation, ESI and other retirement benefits are excluded.
Termination Payments: Retrenchment compensation and ex-gratia payments made upon the termination of employment are not part of the remuneration for this calculation.
Performance-Linked Pay: Annual performance-based incentives, variable parts of a component, and Employee Stock Option Plans (ESOPs) are excluded from the wage definition.
Reimbursements: Any payments made to an employee as a reimbursement for actual expenses (such as medical or travel) are not considered part of wages.

The 50% Rule: The "Deemed Wage" Trigger

The law states that if the total of your "allowances and benefits" (items like HRA, overtime, and PF) exceeds 50% of your total remuneration, the amount exceeding that 50% limit must be added back to your "wages". This revised wage figure is then used for all statutory purposes, including the calculation of gratuity and PF contributions.

Illustrative Wage Structure Example

Below is an illustrative example of a monthly salary structure totaling ₹1,00,000, demonstrating how various components are categorized and calculated.

Example: Monthly Salary Structure (Total Monthly CTC: ₹1,00,000)

A. Core Wage Components (The Base) These are always considered "wages" under Section 2(y):

Basic Salary: ₹20,000
Dearness Allowance (DA): ₹5,000
Core Wages Total: ₹25,000

B. Tracked Allowances (The 50% Threshold Group) These are excluded from wages initially but are tracked under clauses (a) to (i) to determine if they exceed the 50% limit:

House Rent Allowance (HRA): ₹20,000
Conveyance Allowance: ₹5,000
Employer PF Contribution: ₹5,000
Overtime Allowance: ₹5,000
Special Allowance: ₹10,000
Tracked Allowances Total: ₹45,000

C. Strictly Excluded Components (Not in Total Remuneration) These items are not part of the wage definition and are not tracked for the 50% rule:

Gratuity (Component in CTC): ₹10,000
Annual Performance Incentive (Pro-rated): ₹15,000
Medical Reimbursement (against bills): ₹5,000
Strictly Excluded Total: ₹30,000

Step-by-Step Statutory Wage Calculation

Step 1: Determine "Total Remuneration" for the 50% Rule Only Core Wages (A) and Tracked Allowances (B) are added together. Strictly excluded items like gratuity, incentives, and actual reimbursements are ignored for this specific calculation.

₹25,000 (Core) + ₹45,000 (Tracked) = ₹70,000

Step 2: Calculate the 50% Threshold The law states that allowances cannot exceed 50% of the total remuneration.

50% of ₹70,000 = ₹35,000

Step 3: Identify the Excess Compare the actual Tracked Allowances (B) to the Threshold calculated in Step 2.

Actual Allowances: ₹45,000
Allowable Limit: ₹35,000
Excess Amount: ₹10,000

Step 4: Determine Final Statutory "Wages" The excess amount is added back to the core wages to arrive at the base for PF and gratuity.

Core Wages (₹25,000) + Excess (₹10,000) = ₹35,000

Thus, in this example, even though the employee’s contract lists a "Basic + DA" of only ₹25,000, the employer must use ₹35,000 as the "last drawn wage" for calculating gratuity and as the base for PF contributions. This mechanism ensures that benefits are protected even if a salary is heavily weighted toward allowances.

Important Note on "Remuneration in Kind"

One important consideration to keep in mind is the treatment of remuneration in kind, such as food coupons and mobile/broadband recharges etc. If an employer provides such benefits like food coupons, mobile recharges, or ration items under the terms of employment, these are considered "remuneration in kind". These are deemed to form part of wages only to the extent that they do not exceed 15% of the total wages. This is as per the explanation provided in Section 2(y) of the Code.

Disclaimer: The views expressed in this article do not constitute legal or professional advice and are based solely on interpretations of applicable laws. Any professional opinions are provided only pursuant to a formal engagement. Restructuring an existing wage structure in compliance with The Code of Wages, 2019 requires careful analysis of the wage components and interpretation of the provisions in line with the impact on benefit schemes. Please consult with us for advice tailored to your specific situation. The restructuring of an existing wage framework to ensure compliance with the Code of Wages, 2019 necessitates a detailed examination of wage components and a considered interpretation of the statutory provisions, particularly in light of their implications on employee benefit schemes. Please consult with us for specific professional advice tailored to your individual circumstances before taking any action.

Which components are not included in total remuneration, while computing wages under the New Wage Code?

Modified on: Thu, 26 Mar, 2026 at 12:14 AM

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