Gratuity
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
12 March 2010
One of my friends advised to form Employees Gratuity Trust to get Tax Exemption on payment, but I did not understand. Please friends clarify my doubts.
1. For What purpose we have to open an Employees Gratuity Trust? Only Tax purpose or any other benefits?
2. Without formation of Trust can we get tax exemption on Gratuity Expansion to LIC Department? IT Department can allow like this transaction?
3. What is role of Trust? How it is work between company, employee and LIC Department?
4. Can we pay Gratuity amount to direct LIC Department instead of Trust?
5. How much balance we should maintain in Trust Account and LIC? Can we park more then our liability at Trust?
a. Means actual Gratuity is Rs.5, 00,000/- can we park Rs. 10, 00,000/- in Trust?
b. After some time if we required fund then can we withdraw from Trust account (which is kept more than Liability) for Company uses? IT department allow for that transactions?
6. If company closed before 5 years, so, no one employee complete 5 years as per act. Then what about Gratuity Fund? Can company get back that amount from LIC or Trust or we have to pay to employees? Then what about Trust existence?
7. If company exist more then 10 years but no one employee work more then 4 years, then fund will have more then required, then that time also we have to pay Current year Gratuity liabilities.
8. Trust can invest amount in likes FD’s and Mutual Funds to raise income? Instead of putting more amount in LIC? For those earnings we have to pay any taxes?
1. For What purpose we have to open an Employees Gratuity Trust? Only Tax purpose or any other benefits?
2. Without formation of Trust can we get tax exemption on Gratuity Expansion to LIC Department? IT Department can allow like this transaction?
3. What is role of Trust? How it is work between company, employee and LIC Department?
4. Can we pay Gratuity amount to direct LIC Department instead of Trust?
5. How much balance we should maintain in Trust Account and LIC? Can we park more then our liability at Trust?
a. Means actual Gratuity is Rs.5, 00,000/- can we park Rs. 10, 00,000/- in Trust?
b. After some time if we required fund then can we withdraw from Trust account (which is kept more than Liability) for Company uses? IT department allow for that transactions?
6. If company closed before 5 years, so, no one employee complete 5 years as per act. Then what about Gratuity Fund? Can company get back that amount from LIC or Trust or we have to pay to employees? Then what about Trust existence?
7. If company exist more then 10 years but no one employee work more then 4 years, then fund will have more then required, then that time also we have to pay Current year Gratuity liabilities.
8. Trust can invest amount in likes FD’s and Mutual Funds to raise income? Instead of putting more amount in LIC? For those earnings we have to pay any taxes?
12 March 2010
pl.brief your query.
13 March 2010
Dear Anonymous
(2 & 4) As per Income tax act, you get deduction of gratuity on actual payment basis. So even if you do not open a trust but take a lic group gratuity scheme you are elegible for deduction.
(5) You cannot use trust to park your money.
(2 & 4) As per Income tax act, you get deduction of gratuity on actual payment basis. So even if you do not open a trust but take a lic group gratuity scheme you are elegible for deduction.
(5) You cannot use trust to park your money.
26 July 2024
**Understanding Employees Gratuity Trust and Its Benefits**
An Employees Gratuity Trust is a mechanism established by a company to manage and administer gratuity payments to its employees. Here’s a detailed explanation addressing your questions:
### 1. **Purpose of Forming an Employees Gratuity Trust**
- **Primary Purpose:**
- **Tax Benefits:** One of the key reasons for forming a Gratuity Trust is to avail tax benefits. Contributions made to the trust are eligible for tax deductions under Section 36(1)(v) of the Income Tax Act.
- **Regulatory Compliance:** It ensures compliance with the Payment of Gratuity Act, 1972, which mandates the provision for gratuity payments.
- **Other Benefits:**
- **Security for Employees:** Provides a structured approach to managing and disbursing gratuity funds, ensuring that employees receive their dues.
- **Long-Term Planning:** Helps in planning and managing gratuity liabilities more effectively.
### 2. **Tax Exemption Without Formation of Trust**
- **Direct Payment to LIC:**
- If a company opts to pay the gratuity amount directly to LIC under a Group Gratuity Scheme, it can still receive tax benefits. Payments to LIC are typically eligible for tax deductions under Section 36(1)(v) of the Income Tax Act.
- The IT Department does allow such transactions, provided they are made to an approved insurer and meet other compliance requirements.
### 3. **Role of the Trust**
- **Function:**
- **Between Company and Employees:** The trust acts as an intermediary to manage the gratuity funds, ensuring timely payment to employees as per the legal requirements.
- **Between Company and LIC:** The trust can make payments to LIC if the company has a Group Gratuity Scheme. It holds the funds until they are required for distribution.
### 4. **Paying Gratuity to LIC Directly**
- **Without a Trust:**
- Yes, a company can pay the gratuity amount directly to LIC. This method is often simpler and ensures compliance with the Gratuity Act.
- The choice between using a trust and paying directly to LIC depends on the company’s preference and tax planning strategies.
### 5. **Management of Trust Funds**
- **Balance in Trust:**
- **a. Parking More Funds:** A company can park more than the actual liability in the trust. For example, if the gratuity liability is ₹5 lakh, the trust can hold ₹10 lakh. However, it's advisable to review this strategy with a financial advisor to ensure compliance and optimal use of funds.
- **b. Withdrawing Funds:** If excess funds are held in the trust, they can be used for company purposes, subject to compliance with trust regulations and tax implications. The trust’s constitution and tax laws should be consulted.
### 6. **If the Company Closes Before 5 Years**
- **Fund Management:**
- If no employee completes 5 years, the company would need to manage the gratuity fund as per the trust’s terms or return the funds if necessary. The closure of the company would require a settlement of the trust's obligations.
### 7. **If Employees Do Not Complete 5 Years**
- **Excess Funds:**
- If the company exists for over 10 years but no employee completes 5 years, the excess funds should still be used to meet current year’s gratuity liabilities. Maintaining a balance between liabilities and available funds is crucial.
### 8. **Investing Trust Funds**
- **Investments:**
- **FDs and Mutual Funds:** The trust can invest in fixed deposits and mutual funds to earn returns. This helps in growing the fund.
- **Tax Implications:** Income earned by the trust on investments is generally taxable. The trust will need to file returns and pay taxes on such income. Specific tax treatment depends on the type of investments and current tax regulations.
### **Summary:**
- **Trust Formation:** Helps in managing and administering gratuity payments and availing tax benefits.
- **Direct Payment to LIC:** Allowed and can also provide tax benefits.
- **Fund Management:** The trust can hold more funds than the liability and can invest in various instruments. Any excess funds and their utilization should be managed in accordance with the trust deed and tax regulations.
- **Closure and Excess Funds:** Need to manage according to legal and regulatory requirements.
**Recommendation:** Consult with a tax advisor or legal expert to ensure compliance with regulations and optimize the financial management of the gratuity fund.
An Employees Gratuity Trust is a mechanism established by a company to manage and administer gratuity payments to its employees. Here’s a detailed explanation addressing your questions:
### 1. **Purpose of Forming an Employees Gratuity Trust**
- **Primary Purpose:**
- **Tax Benefits:** One of the key reasons for forming a Gratuity Trust is to avail tax benefits. Contributions made to the trust are eligible for tax deductions under Section 36(1)(v) of the Income Tax Act.
- **Regulatory Compliance:** It ensures compliance with the Payment of Gratuity Act, 1972, which mandates the provision for gratuity payments.
- **Other Benefits:**
- **Security for Employees:** Provides a structured approach to managing and disbursing gratuity funds, ensuring that employees receive their dues.
- **Long-Term Planning:** Helps in planning and managing gratuity liabilities more effectively.
### 2. **Tax Exemption Without Formation of Trust**
- **Direct Payment to LIC:**
- If a company opts to pay the gratuity amount directly to LIC under a Group Gratuity Scheme, it can still receive tax benefits. Payments to LIC are typically eligible for tax deductions under Section 36(1)(v) of the Income Tax Act.
- The IT Department does allow such transactions, provided they are made to an approved insurer and meet other compliance requirements.
### 3. **Role of the Trust**
- **Function:**
- **Between Company and Employees:** The trust acts as an intermediary to manage the gratuity funds, ensuring timely payment to employees as per the legal requirements.
- **Between Company and LIC:** The trust can make payments to LIC if the company has a Group Gratuity Scheme. It holds the funds until they are required for distribution.
### 4. **Paying Gratuity to LIC Directly**
- **Without a Trust:**
- Yes, a company can pay the gratuity amount directly to LIC. This method is often simpler and ensures compliance with the Gratuity Act.
- The choice between using a trust and paying directly to LIC depends on the company’s preference and tax planning strategies.
### 5. **Management of Trust Funds**
- **Balance in Trust:**
- **a. Parking More Funds:** A company can park more than the actual liability in the trust. For example, if the gratuity liability is ₹5 lakh, the trust can hold ₹10 lakh. However, it's advisable to review this strategy with a financial advisor to ensure compliance and optimal use of funds.
- **b. Withdrawing Funds:** If excess funds are held in the trust, they can be used for company purposes, subject to compliance with trust regulations and tax implications. The trust’s constitution and tax laws should be consulted.
### 6. **If the Company Closes Before 5 Years**
- **Fund Management:**
- If no employee completes 5 years, the company would need to manage the gratuity fund as per the trust’s terms or return the funds if necessary. The closure of the company would require a settlement of the trust's obligations.
### 7. **If Employees Do Not Complete 5 Years**
- **Excess Funds:**
- If the company exists for over 10 years but no employee completes 5 years, the excess funds should still be used to meet current year’s gratuity liabilities. Maintaining a balance between liabilities and available funds is crucial.
### 8. **Investing Trust Funds**
- **Investments:**
- **FDs and Mutual Funds:** The trust can invest in fixed deposits and mutual funds to earn returns. This helps in growing the fund.
- **Tax Implications:** Income earned by the trust on investments is generally taxable. The trust will need to file returns and pay taxes on such income. Specific tax treatment depends on the type of investments and current tax regulations.
### **Summary:**
- **Trust Formation:** Helps in managing and administering gratuity payments and availing tax benefits.
- **Direct Payment to LIC:** Allowed and can also provide tax benefits.
- **Fund Management:** The trust can hold more funds than the liability and can invest in various instruments. Any excess funds and their utilization should be managed in accordance with the trust deed and tax regulations.
- **Closure and Excess Funds:** Need to manage according to legal and regulatory requirements.
**Recommendation:** Consult with a tax advisor or legal expert to ensure compliance with regulations and optimize the financial management of the gratuity fund.
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