16 January 2014
Funded gratuity is the employee benifit scheme for which, a separate fund, trust or like arrangement has been made. Like OGDCL, Mari Gas and many other has arranged separate pension fund, providend fund and gratuity funds. (Separate Board of Trustees In this case the related liabilities and assets are not recorded in books of the Company.( Usually Liability of the company is discharged when it pays to the fund, However it also depends upon whether it is defined contribution or defined benefit plan)
Whereas, Non funded gratuity is the plan where no separate arrangement as explained above has been made and all amount payable to employees is recorded as liability in the books of the company and like wise the related assets.
Valuation of the liabilities is made by the acturies which is then recorded in books of account of the company by debiting the provision and crediting the liability account. (Actuarial valuations are required becasue the liability is to be based on many assumptions, like the employee turnover, what would be his salary when the employee would leave)
Querist :
Anonymous
Querist :
Anonymous
(Querist)
16 January 2014
Dear Hemant Kumar,
We have paid certain amount to LIC from our Provision for Gratuity in the month of May.
Kindly let me know whether the same is allowed under Income Tax Act or not ?
16 January 2014
The provisions relating to approved Gratuity Funds are set out in Part 'C' of the Fourth Schedule of the Income Tax Act, 1961 and part XIV of the Income Tax Rules, 1962.
The list of important aspects and the relevant rules / sections dealing with these aspects and clauses in the Model Trust Deed / Rules of LIC of India are detailed below : Employer's annual contribution or premium paid up to 8.33% of Salary shall be treated as expenses of management and shall be exempt from tax. This amount shall also not be treated as income or perquisites in the hands of the employee [Sec. 36(1)(V)] Interest earned on Fund is exempt from Income Tax No deduction is allowed for accounting provision made by Employer for payment of Gratuity. [Sec. 40A(7)(a)] Deduction is allowed for provision made by Employer for payment of contribution to Fund or payment of Gratuity that has become payable. [40A(7)(b)(i)] Contribution by the Employer should be paid to the Fund for claiming relief. [Sec. 43B] Gratuity is payable in lumpsum only. [Rule 3 of Part C of Schedule IV] Gratuity is salary and hence taxable. It is taxed on due basis [Sec. 17]. But Under Section 10(10)(iii) and 10(10)(ii) gratuity upto Rs. 3.50 Lakhs is exempt from Income Tax.
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