12 July 2017
in private sector when amount of gratuity is paid by employer. this expenses in which manner allows to employer as expense allowable under PGBP ?
26 July 2024
### **Gratuity in Private Sector: Tax Treatment and Accounting**
**1. **Tax Deductibility of Gratuity Expenses for Employers:**
- **Under the Income Tax Act:** - Gratuity payments made by employers to their employees are allowable as a deduction under the head **Profit and Gains of Business or Profession (PGBP)**. This is covered under **Section 37(1)** of the Income Tax Act, 1961. - To claim the deduction, the payment should be made in accordance with the provisions of the Payment of Gratuity Act, 1972, or the applicable terms of employment contracts.
**2. **Accounting for Gratuity:**
- **Accounting Standard (AS) 15:** - Under **AS 15 (Revised 2005)**, which deals with **Employee Benefits**, the employer is required to recognize the cost of employee benefits as an expense. This includes gratuity payments. - **AS 15** requires employers to recognize a liability for future gratuity payments and account for it using actuarial valuations. The standard mandates recognizing a provision for gratuity in the financial statements based on the actuarial valuation of the liability.
**3. **Legal Background:**
- **Payment of Gratuity Act, 1972:** - The provisions regarding the payment of gratuity are primarily governed by the **Payment of Gratuity Act, 1972**. The Act specifies the conditions under which gratuity becomes payable, the calculation of the amount, and the obligations of the employer.
**4. **Conditions Related to Gratuity Payment:**
- **Eligibility Criteria:** - An employee must have completed at least **5 years** of continuous service to be eligible for gratuity under the Payment of Gratuity Act. The Act defines continuous service as uninterrupted service, which includes the time an employee has worked with the same employer, except for certain periods of authorized leave.
**5. **Deductibility and Accounting Entries:**
- **Deductibility as Expense:** - Gratuity payments are deductible in the year they are paid, provided they are in accordance with the applicable laws or terms of employment. If a company creates a provision for gratuity based on actuarial valuation, it should be debited to the Profit and Loss Account as an expense.
- **Accounting Entries:** - **Provision for Gratuity:** Debit to Gratuity Expense Account and Credit to Provision for Gratuity Account. - **Payment of Gratuity:** Debit to Provision for Gratuity Account and Credit to Bank/Cash Account.
### **Summary:**
1. **Tax Deductibility:** - Gratuity payments are deductible under **Section 37(1)** of the Income Tax Act.
2. **Accounting Treatment:** - Follow **AS 15** for recognizing and measuring the gratuity liability and expenses.
3. **Legal Framework:** - Governed by the **Payment of Gratuity Act, 1972**, with eligibility criteria of at least 5 years of service.
4. **Conditions:** - Continuous service of 5 years is required to qualify for gratuity under the Act.
This ensures that the employer's financial statements reflect the appropriate expense and liability related to employee benefits in compliance with legal and accounting standards.
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