Rule 308 — Commutation of annuity.
The rule caps any payment made in commutation of an annuity. Where the employee receives any gratuity, the payment shall not exceed the commuted value of one-third of the annuity he is normally entitled to receive. In any other case it shall not exceed the commuted value of one-half of that annuity. That commuted value is to be determined having regard to the age of the recipient, the state of his health, the rate of interest and officially recognised tables of mortality.
An approved superannuation fund exists to pay an annuity, and commutation converts that stream into a lump sum. Left unlimited, commutation would let the fund be emptied at once and defeat the purpose the approval rests on. The rule keeps a majority of the annuity intact in every case, and takes a stricter line where the employee is also getting a gratuity, since he then has another lump sum in hand. It also stops the commuted figure being a matter of negotiation by naming the four factors it must be worked out on.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Ceiling on commutation where the employee receives any gratuity | The commuted value of one-third of the annuity which he is normally entitled to receive | This is an upper limit on the payment, not a fixed entitlement | Clause (a) |
| Ceiling on commutation in any other case | The commuted value of one-half of such annuity | Where the employee receives no gratuity; again an upper limit | Clause (b) |
| Basis for determining commuted value | The age of the recipient, the state of his health, the rate of interest and officially recognised tables of mortality | The rule names the factors and states no rate or table of its own | Clause (b) |
Both figures are ceilings, not entitlements: the rule says the payment shall not exceed the commuted value of the stated fraction, so a smaller commutation is unobjectionable and neither fraction is a sum anyone is promised. The fractions bite on the annuity the employee is normally entitled to receive, not on the fund's accumulated balance, so the calculation starts from the annuity and works back. Receipt of any gratuity, not gratuity of any particular size, is what moves the case from one-half to one-third. And the rule prescribes no rate and no mortality table: the commuted value is determined having regard to age, health, the rate of interest and officially recognised tables of mortality, so those inputs come from outside the rule and no figure may be read into it.
An employee normally entitled to an annuity of Rs. 1,20,000 a year retires and also receives a gratuity. Commutation may not exceed the commuted value of one-third of that annuity, that is of Rs. 40,000 a year, the commuted value being worked out having regard to his age, the state of his health, the rate of interest and officially recognised tables of mortality. Had he received no gratuity, the limit would have been the commuted value of one-half, that is of Rs. 60,000 a year.
An employee meets this rule at retirement, when the trustees of the fund calculate how much of his annuity may be commuted into a lump sum and on what actuarial basis.
Any payment in commutation of annuity shall not exceed—
in a case where the employee receives any gratuity, the commuted value of one-third of the annuity which he is normally entitled to receive
in any other case, the commuted value of one-half of such annuity, such commuted value being determined having regard to the age of the recipient, the state of his health, the rate of interest and officially recognised tables of mortality