Discount Rate is one of the key actuarial assumptions used in employee benefits valuation and is based on the market yields on Government bonds as on balance sheet date with the term matching to expected future service of the Company. We refer to FIMMDA website for taking discount rates. G-sec rates are also published on FBIL website https://www.fbil.org.in/#/home.
Actuarial calculations involve cash-flow projections for each employee right up to retirement age. Discount rate is used to discount the expected future cash flows to arrive at the present value of obligation of employee benefit plans.
The yields on the government bonds were fairly stable during the last year but we have seen a drop by approximately 20 basis points across all tenures. The 10-year bond rate is 7.2% for the current period. Since employee benefit liability is inversely proportional to the discount rates, this drop in rates will impact the employee benefit provision of the companies. The below graph shows the comparison of yields at different dates.
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