Gratuity to director

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18 March 2014 Whether Gratuity could be paid to Director of a Private Limited Company?

CA Surendra Bhatt (ACA,DISA)

CA Surendra Bhatt (ACA,DISA) (Expert)
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18 March 2014 If he is a employeee of the company then why not?

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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26 July 2024 Yes, gratuity can be paid to a director of a private limited company, but there are specific considerations and requirements to keep in mind:

### **Gratuity Payment to a Director**

1. **Eligibility:**
- Gratuity is typically paid to employees, and directors who are also employees of the company are eligible for gratuity. This usually applies to directors who are on the company's payroll and are not merely paid as consultants or in their capacity as non-executive directors.

2. **Nature of Directorship:**
- For the director to be eligible for gratuity, they must be a whole-time director or an employee of the company. Non-executive directors or those who are not on the company's payroll are not eligible for gratuity.

3. **Gratuity Act Provisions:**
- Under the **Payment of Gratuity Act, 1972**, gratuity is payable to employees who have completed at least five years of continuous service. If the director falls under the category of "employee" as per the Act, they will be eligible for gratuity on the same terms as other employees.

4. **Accounting and Compliance:**
- The company must ensure that the gratuity provision for the director is accounted for correctly in the company's financial statements.
- The gratuity payable to a director should be in accordance with the company's gratuity policy, which should be compliant with the Payment of Gratuity Act, if applicable.

5. **Tax Implications:**
- The gratuity paid to a director will be subject to the same tax provisions as that for other employees. The exemption limits under Section 10(10)(ii) of the Income Tax Act will apply.

### **Accounting Treatment and Policy**

1. **Provision for Gratuity:**
- Companies should make a provision for gratuity in their financial statements as per the **Accounting Standard 15 (AS 15)** or **Ind AS 19** if applicable. This provision should include gratuity for all eligible employees, including directors.

2. **Gratuity Fund:**
- The company can set up a gratuity fund, and contributions can be made to this fund for both employees and directors. This fund is often managed through an insurance company or trust.

3. **Policy Documentation:**
- The company's policy on gratuity should be clearly documented and should include provisions for directors if they are considered employees under the law.

4. **Legal Compliance:**
- Ensure compliance with the legal requirements under the Payment of Gratuity Act and other applicable laws related to gratuity payments.

### **Summary**

Gratuity can be paid to a director if the director is also an employee of the company. The company must comply with legal and accounting requirements, and ensure that the gratuity payment is made in accordance with applicable laws and company policies.

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