Gratuity accounting in company's books

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jayesh shah (Querist)
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21 January 2024 Ours is pvt ltd co. we have formed separate group gratuity trust and it was approved by Income tax department.
The Gratuity Trust has invested the money with LIC Group Gratuity Scheme.

1. We are making provision for Gratuity liability as actuarial report (as per INDAS) in the books of company and shown on liability side under provision.
2. Whatever amount we pay to LIC is shown under assets side as Gratuity Fund with LIC and every year what ever we pay is getting added in the balance and claim deduction for what ever amount is paid to LIC.

Just now we are passing only 2 entries in the company's books
1 - Provision of Gratuity as per actuarial Report
Gratuity a/c Dr. (profit & loss)
To Provision for Gratuity (Liability Side)

2 - For amount paid to LIC for Group gratuity scheme.
Gratuity Fund (LIC) Dr. (Assets side)
To Bank Account

my question
3. Whatever Interest we received from LIC is shown as income in gratuity Trust. & Trust is having separate PAN No. and we also file Trust Income Tax Return. - so shall we also show that Interest income in Company's profit & Loss account ? if yes how -i.e. what entry should be passed -say interest shown as income in p&l but dr. to what ?

4. when ever employee left the job and having completed 5 years - LIC pay Gratuity Directly to Group Gratuity Trust account and from trust account it is directly paid to employees.

Do we also have to show Gratuity paid to employees in company's books of account if yes what will be the entry ? i.e. which account will be debited and which account will be credited ?

highly appreciate if some one help to solve our query.
Thanks in Advance.

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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07 July 2024 Your queries regarding the treatment of gratuity in a private limited company with a separate group gratuity trust are quite specific and require careful consideration of accounting principles and tax implications. Here’s how you can address each question:

### Question 3: Treatment of Interest Income from LIC in Company's Books

Since the Group Gratuity Trust has its own PAN and files its own Income Tax Return, the interest income earned by the Trust should ideally be accounted for in the Trust's books and not in the company's Profit & Loss Account. However, for the purpose of claiming deduction under Section 36(1)(vii) of the Income Tax Act, which allows a deduction for the interest paid on borrowed capital for business purposes including gratuity funds, the interest income should be shown in the company's books. Here’s how you can account for it:

- **Entry in the Company's Books:**
- Debit: Interest Income (Profit & Loss Account)
- Credit: Interest Receivable (Gratuity Fund with LIC)

This entry ensures that the interest income is accounted for in the company’s financial statements, which aligns with the deduction claim under Section 36(1)(vii).

### Question 4: Treatment of Gratuity Payments to Employees

When an employee leaves the job after completing 5 years and receives gratuity from the Group Gratuity Trust, you need to record this transaction in the company’s books as well. Here’s the accounting treatment:

- **Entry in the Company's Books:**
- Debit: Gratuity Expense (Profit & Loss Account)
- Credit: Bank Account

This entry reflects the payment made by the company to the employee. The expense is recognized in the Profit & Loss Account, aligning with the accounting treatment for employee benefits.

### Additional Considerations:

- **Actuarial Valuation:** Ensure that the provision for gratuity liability is based on an actuarial valuation as per IND AS requirements. This ensures the liability is accurately reflected in the company’s financial statements.

- **Tax Deduction:** The payments made to the Group Gratuity Trust are eligible for deduction under Section 36(1)(v) of the Income Tax Act, subject to certain conditions.

- **Trust Transactions:** Maintain clear documentation and records of transactions between the company and the Group Gratuity Trust to ensure compliance with tax and accounting regulations.

By following these guidelines, you can ensure proper accounting treatment of gratuity transactions in your private limited company with a separate group gratuity trust. However, for specific and detailed advice tailored to your company’s circumstances, consulting with a qualified accountant or tax advisor would be highly recommended. They can provide personalized guidance based on the latest regulatory requirements and interpretations.