Introduction
The Payment of Gratuity Act, 1972 is applicable to all establishments (i.e. MNC's, Private Schools, Private Colleges, Private Universities, NGO's, Autonomous Bodies and Other business entities) having more than 10 employees. Gratuity is a statutory right of employee whoever completes 5 years in the same Establishment and is a terminal benefit, it means gratuity amount will be determined when the monthly terminal wages of the employee are known to Establishment. The cost is to be borne by the Employer and not by the Employee hence it can neither be shown as deduction from employees salary nor as a Part of CTC of employee.
Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years,-
(a) on his superannuation, or
(b) on his retirement or resignation,
(c) on his death or disablement due to accident or disease
Provided that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement
Legal Compliances
For the purpose of effectively implementing the Payment of Gratuity Act, 1972, the following compliances are imposed on Establishments by the Competent Authority (i.e., Deputy Labor Commissioner) Regulating the Provisions of the Payment of Gratuity Act, 1972.
1. As per provision of Rule 3 of the Payment of Gratuity Rules – Notice of Opening, Change or Closure of the Establishment following Forms to be submitted by the establishment to Competent Authority (i.e. DLC Office)
I. Form A - Notice of Opening
II. Form B - Notice for Change in Name, Address, Employer or Nature of Business.
III. Form C - Notice for Closure of Establishment.
IV. Form F - Nominations - As per provisions of Rule 6 the Payment of Gratuity Rules, All Indian Establishments with employee strength 10 or more are required to maintain the records of Form – F, so that they will have all information available to make the payment of gratuity to employee or his Nominee/Nominees within 30 Days on exit or death of employee (Refer Section 7 of the Payment of Gratuity Act, 1972)
V. Maintenance of Records other Forms as prescribed in Rules of the Payment of Gratuity Rules
It is important to note that for compliance of the above provisions of the Payment of Gratuity Rules, all establishments are required to comply with the provisions of sub-section (3) of Section 4A – Compulsory Insurance, of the Payment of Gratuity Act, 1972, The extract of this sub-section is as under: -
"For the purpose of effectively implementing the provisions of this section, every employer shall within such time as may be prescribed get his establishment registered with the controlling authority in the prescribed manner and no employer shall be registered under the provisions of this section unless he has taken an insurance referred to in sub-section (1) or has established an approved gratuity fund referred to in sub-section (2) of the Payment of Gratuity Act, 1972.
In this section "approved gratuity fund" shall have the same meaning as in clause (5) of section 2 of the Income-tax Act, 1961 (43 of 1961). As per S. 2(5) of the Income Tax Act, 1961, unless the context otherwise requires, the term "approved gratuity fund", means a gratuity fund which has been and continues to be approved by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in accordance with the rules contained in Part C of the Fourth Schedule.
However, to get approval for gratuity fund, an application is required to be submitted as per formats/ procedure prescribed under Income Rule 109.
It may be noted that Section 36(1)(v) provides for deduction against business income for ‘any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust'. Also, that any income of an approved gratuity fund is exempt under Section 10(25)(iv) of the Income Tax Act, 1961.
Contributions by Employer in the gratuity fund are generally based on Actuarial Valuation.
The above details explained that an establishment can register with Competent Authority (i.e. DLC Office) once they form an Irrevocable Trust for CIT Approved Gratuity Fund and group gratuity scheme of following Insurers:
i. LIC
ii. SBI Life
iii. HDFC Life
iv. Kotak Life
v. Future Generali etc.
(Kindly note that companies already registered under the provisions of the Payment of Gratuity Act, 1972 will get exempted from registration under the new provisions of the Social Security Code 2020)
Accounting Compliances
As per provisions of Section 129 of the Companies Act 2013, Indian and Multinational Companies Operating India needs to prepare the Financial Statement such as Balance Sheet & Profit/Loss Accounts at the closure of each financial year in compliance of Accounting Standards as stipulated in Section 133 of the Companies Act 2013, so that they can give a true and fair view of state of affairs of the company.
Accounting and Disclosure requirements for Employee Benefits Plans (i.e., Gratuity Plan) is laid down in the following 2 Accounting Standards as issued by The Institute of Chartered Accountants of India (ICAI): –
A. Indian Accounting Standard for Accounting of Employees Benefits
I. INDIAN GAAP- AS-15 (Revised 2005)
II. IndAS-19
Generally, Actuarial Valuations for compliance above Accounting Standards are required for Gratuity and following Employee Benefit Plans under: –
a. Actuarial Valuation for Gratuity Plans,
b. Actuarial Valuation for End of Service Benefit Plan,
c. Actuarial Valuation for Earned Leave Plan,
d. Actuarial Valuation for Sick Leave Plan,
e. Actuarial Valuation for Defined Benefit Pension Plans,
f. Actuarial Valuation for Post-Retirement Medical Benefit Plan,
g. Actuarial Valuation for Settlement Allowances on Retirement,
h. Actuarial Valuation for Long Service Award Plans/Incentive Plans,
i. Actuarial Valuation for Interest Rate Guarantee for Exempted Provident Funds,
j. Actuarial Valuation for other Defined Benefit,
Most frequently following terms are used in Actuarial Reports in compliance of the above standards are:
i. Present Value of obligation.
ii. Interest Cost.
iii. Current Service Cost.
iv. Service Cost
v. Past Service Cost.
vi. Curtailment Cost
vii. Settlement Cost
viii. Benefit Paid.
ix. Actuarial Gain/loss
x. Experience adjustment
xi. Other Comprehensive Income.
xii. Defined Benefit Obligation.
xiii. Estimated Term of Benefit Obligation.
xiv. Statement of Profit/loss.
xv. Interest Rate for Discounting.
xvi. Salary Escalation Rate.
xvii. Withdrawal Rate
xviii. Mortality Rate, etc. etc.
Actuarial Valuations are required by the Indian Companies in the following events: -
I. For making the Initial & Annual Contribution into Gratuity Trust Account.
II. Annually, Half Yearly and Quarterly for making provision of Gratuity Liability in BS as Accounting Standards (i.e. AS 15 Revised 2005) and IndAS 19) per Section 133 of the Companies Act, 2013
III. On The Date of Transfer of Employees from One Company to Another
IV. On the Date of Acquisition
V. On the Date of De-merger
VI. For Submission of Actuarial Reports of last 5 year in SEBI for Listing on Share Market
VII. For assessment of Actuarial Liability for Taking Grant from any Ministry
The author can also be reached at tikaramchaudhary@gratuitytrustfund.com.
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