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Allowance of gratuity

CA Bijay Shrestha (Never Give up....No matter what....) (858 Points)

25 July 2013

Dear Experts,

please kindly advice,

As we all know that many companies provide gratuity as per Actuarial Valuation ascertained by Actuary. And this is disallowed while computing taxable income of Company. But my view is as this provision for Gratuity computed by Actuary, this is ascertained Liability and it should bee allowed as deduction for computation of Taxable Income.

On the other hand, Contribution made to approved Gratuity Fund is allwed as deduction u/s 40A(7).

Please kindly make me understand the difference between thesse two form of Gratuity and its deductibility for Taxable income.

Thanks in Advance.

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6 Replies

varun (article assistant) (86 Points)
Replied 25 July 2013

why gratuity is disallowed means you havent paid any gratuity. gratuity paid during the year is allowed as deduction. u r just passing provision entry. so they are disallowing the provision for gratuity while calculating taxable income. read section 40A(7) with sec. 43B for more clarification.

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CA Bijay Shrestha (Never Give up....No matter what....) (858 Points)
Replied 25 July 2013

Thanks Varun.

It means the employer doesnot make any payment towards Gratuity but only make provision, that's why it is disallowed.

In contrary, In case of Approved Grautuity fund, the employer makes actual payment that's why deduction is allowed. correct??

And one more thing, suppose, there is Approved Gratuity Fund and the employer is liable to make contribution but instaed of making any payment, it made provision for that gratuity to be paid to that Approved Gratuity Fund. Is that Provision allowed??

pleaase kindly suggest.

varun (article assistant) (86 Points)
Replied 25 July 2013

Correct.

Section 43B says that certains expenses can be allowed only on payment basis. 43B is applicable to gratutiy also. So what u ve paid is allowed as deduction and provisions will not be allowed as deduction.

SURESH (Not Specified) (43 Points)
Replied 04 November 2014

There is a basic difference between the "Funding" and "Accounting". Accouting is prescribed (as per AS15(R)). In India, there is no compulsion on funding (contribution into the fund) of the gratuity schemes. However, based on Gratuity Liability calculated by an actuary, firm comes to know whether the scheme is underfunded or overfunded.

Theja Gajula (22 Points)
Replied 27 August 2016

Sir

In case the employer remitted more than what the provision is made, in that situation either the employer is able to get the deduction for actual payment or to the extent of provision made ?

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Theja Gajula (22 Points)
Replied 27 August 2016

Sir

In case the employer remitted more than what the provision is made, in that situation either the employer is able to get the deduction for actual payment or to the extent of provision made ?